How to Buy Assets in a 363 Sale: A Guide
November 11, 2024
If you’re looking for an opportunity to acquire valuable, but distressed, assets, a Section 363 Sale is a good vehicle to do so. Named after Section 363 of the U.S. Bankruptcy Code, this type of sale allows for the purchase of assets from a business (or even an individual) in bankruptcy, usually free of liens and other encumbrances.
Here’s what you need to know if you’re considering participating in a 363 sale.
What is a 363 Sale?
A 363 sale is a legal mechanism that allows a bankrupt company to sell its assets to a third party, outside of the traditional Chapter 11 reorganization process. The assets can range from real estate and equipment to intellectual property, inventory, and even entire business units.
The sale must be approved by the bankruptcy court, ensuring that the transaction is in the best interest of the debtor’s estate, creditors, and other stakeholders. This process often creates opportunities for buyers to acquire high-value assets without assuming the seller’s debts.
Benefits of Buying in a 363 Sale
One of the most significant advantages of purchasing assets through a 363 sale is that the buyer typically acquires them “free and clear” of liens, claims, and encumbrances. This means you won’t inherit the bankrupt company’s obligations, such as unpaid loans or lawsuits.
Other key benefits include:
- Potential Bargains: Since the seller is motivated to offload assets quickly, prices are often lower than market value.
- Speed of Process: Compared to traditional asset acquisition, a 363 sale tends to move quickly, allowing the buyer to take control of the assets sooner.
The 363 Sale Process
1. Locate Potential Opportunities
Bankruptcy sales are often public, so keeping an eye on court dockets, industry publications, or working with an attorney who specializes in bankruptcy can help you identify potential opportunities. Many legal platforms publish notices about 363 sales, making it easier for buyers to find deals.
A debtor (and sometimes a bankruptcy trustee) will typically file a motion with the bankruptcy court to approve bidding procedures, such as the components of a qualified bid (or bidder), such as a deposit, bid deadlines, treatment of certain contracts, dates for the auction and sale hearing.
2. Due Diligence
Once you’ve identified an asset of interest, the next critical step is performing due diligence. Although the assets are sold free and clear of encumbrances, it’s essential to fully understand what you’re buying. Examine the condition of the assets, any potential environmental or other liabilities, and whether any regulatory approvals are necessary. Curing contract defaults might be required.
The winning bidder will almost always be required to buy assets on an “as-is where-is” basis. Detailed diligence is crucial to ensure you’re comfortable with any risks.
3. Submit a Stalking Horse Bid
If you’re serious about an asset, consider becoming the “stalking horse bidder.” A stalking horse is a qualified buyer who sets the baseline bid, and in return the debtor typically offers certain incentives, such as breakup fees or expense reimbursements, if a higher bid from another buyer is ultimately accepted and ratified by the court.
Being the stalking horse allows you to perform due diligence early, get a head start in negotiations, and set terms that might benefit the stalking horse bidder at the expense of other potential buyers. But remember, your bid will be public, and others can submit higher offers during the auction.
4. Participate in the Auction
If there are multiple interested buyers (or if the debtor wants to publicly market its assets), the court will usually require an auction, sometimes private, sometimes public. All qualified bidders will have the opportunity to improve their offers in a competitive bidding process. The court will then approve the best offer, considering not just price but also the terms and likelihood of closing the deal.
A buyer must be financially and logistically prepared to move quickly. 363 sales often have strict timelines for closing.
5. Court Approval
After the auction, the court will hold a sale hearing to approve the transaction. The judge will ensure that the sale is conducted fairly and in the best interest of all parties involved. Assuming no objections, the court will issue an order authorizing the sale, officially transferring ownership of the assets to you. If objections are filed, the inning bidder must sometimes be prepared for additional negotiations in the halls of the courthouse.
6. Closing the Deal
Once the court approves the sale, it’s time to finalize the transaction. This includes executing the purchase agreement, transferring titles, and arranging for payment. After closing, the assets are yours, free and clear of any prior claims or liabilities.
Key Considerations for Buyers
Have Financing Ready: Since 363 sales move quickly, having your financing in place before the auction is essential. Traditional lenders may not act fast enough, so consider alternative financing sources if necessary.
Understand the Bankruptcy Court’s Role: The bankruptcy court oversees the entire process, ensuring fairness and transparency. However, this also means the court has the final say on all aspects of the sale, including any disputes that arise.
Expect Competition: While 363 sales can offer bargains, they often attract a range of bidders. Be prepared for competitive bidding and know your limits in advance to avoid overpaying.
Consult Experts: Given the complexity of bankruptcy law, working with an experienced bankruptcy attorney and financial advisors is crucial. They can help you navigate the legal process, conduct due diligence, and negotiate favorable terms.
Conclusion
A 363 sale can be a fantastic way to acquire valuable assets, but the process is not without its challenges. By understanding the intricacies of the bankruptcy court system and preparing adequately, you can secure a deal that positions your business for growth and success.