I want to purchase a financially unstable or recently bankrupt company. I know this strategy is risky, but I need to minimize my costs. Are there private or government listings of small-business bankruptcies? Should I check bankruptcy-court records? Should I try working through a business broker? I would also appreciate more general advice on the wisdom of my plans.
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"There's one big advantage to buying a company in Chapter 11 proceedings," says David Ferrari, president of Argus Management Corp. "There won't be any unknown liabilities coming back to haunt you." But Ferrari cautions that "you must be prepared to act very quickly, and then be prepared to wait, since the bankruptcy process takes time. You must have cash, since debt assumption alone is normally not enough. And know why the business failed and why it won't fail under you."
Ferrari, who identified the signs of a troubled company in our July story on cost cutting ("Squeeze Play," July 1990, [Article link]), suggests checking with the clerk's office at your regional bankruptcy court for companies that have already sought protection. If any of those companies interest you, contact the district U.S. Trustee's Office, which handles the administrative side of bankruptcy. It may have listings of assets and liabilities, the names of lawyers involved in the case, and the meeting dates and people included in creditor committees. When you're ready to make an offer, you'll have to deal with the estate and whoever is in charge of it -- either the debtor, under court supervision, or a court-appointed trustee.
"Make sure you're represented by a good bankruptcy attorney," Ferrari warns, "someone who knows everything you have to do and what order to do it in, because you'll probably end up in a bidding war and will need sound advice.
"Locating troubled companies that have not yet filed will be much harder," he says. "Sources would be workout offices at commercial banks, bankruptcy lawyers, and turnaround consultants." See the Law and Business Directory of Bankruptcy Attorneys (Prentice Hall). For consultants, check the directory of the Turnaround Management Association (1152 Executive Cir., Suite 203, Cary NC 27511; phone 919-481-1888).
"Brokers generally work for the seller, who pays them the commission," says Tom West, editor and publisher of "The Business Broker," an industry newsletter. "They're not going to represent a company with no money."
Instead, says West, "since much of this is public record, I would pick the industries I was interested in and identify their SIC codes, then get a D&B rating book and check out companies whose ratings are low." If your business has an account with Dun & Bradstreet, you can get a full report on an interesting company for about $60 through D&B Express (800-362-2255). While that will get you started, take the information with a grain of salt. In "Getting Paid" (June 1990, [Article link]), we found that material in those reports can be vague, dated, or just plain wrong. West's other recommendation: "California and other states publish journals listing bulk sales, liens, and creditor claims."
He also offers this warning: "I suspect Mr. Chambers is looking for an unhealthy company because he can't afford a healthy one. That's not the way to do it. The bankruptcy courts are not going to approve a sale to someone who's strapped for cash. Instead, I'd work to find a smaller, healthy company I could afford."
Hendrix F. C. Niemann, president of Automatic Door Specialists Corp., in Laurel, Md., chronicled his search for a business to buy in Inc.'s February 1990 cover story [ [Article link]]. He suggests placing a classified ad in the business opportunities section of newspapers, specifying that you're looking for a company in trouble. "I promise him he'll be deluged with more calls than he can handle." n