Biofuels Business - August, 2011 - (Page 16)

FEATURE: MAKING THE DEAL and understand completely what they are buying. “If you have more unanswered questions, you probably have to do more due diligence,” Funk said. “Establish a price limit and do it early in the process, so you know when you’ve reached your limit.” From a seller’s perspective, having a strong balance sheet will help attract attention, as will having a good reputation. “People saying good things about your business and how you operate, and an established customer base, will add value to your business that doesn’t show up on a balance sheet,” Funk said. Other considerations include whether to buy/sell stocks or assets, she said. Assets include known liabilities, while with stocks a buyer assumes the history and the future of the entity. From a buyer’s perspective, the safest option is to buy assets. But a seller is likely more focused on selling stock in order to sell off some liability and for tax purposes. In a stock purchase, the buyer steps into the shoes of the existing investors and assumes the existing liabilities, said BrownWinick’s Kruse. This is typically a taxable event. In an asset purchase, the buyer can pick and choose the speciﬁc assets to be purchased and the liabilities to be assumed. The cash proceeds create a taxable event, but stock exchanged for assets can provide for tax-free treatment if certain factors are met. Generally, the purchaser of assets is not liable for the debts or liabilities of the seller, unless the parties speciﬁcally agree to that in the purchase agreement. There are several exceptions to this rule, Kruse said, including: an actual or de facto merger of the seller and purchaser; the purchaser is held to be a mere continuation of the seller; or the transaction is held to have been entered into fraudulently to escape liability. Mergers are another option, Kruse said. Existing liabilities are assumed and any cash considerations trigger a tax event. While corporation to corporation mergers can be efﬁcient, crossing entity 16 structures creates tax issues and other complexities. Debt acquisition is another possibility, with an investor purchasing or controlling the entity based on ownership of debt. The investor may hold the debt or exchange it for equity, or could foreclose on collateral following purchase of the debt. DISTRESSED SALES It becomes an entirely different situation if the property is considered distressed, Kruse said. A distressed fa- From a seller’s perspective, having a strong balance sheet will attract attention. cility is one where the secured debt is under water, there are multiple layers of debt, there are signiﬁcant vendor and creditor claims and/or there are unhappy equity holders. The best option may be to structure the sale through a bankruptcy proceeding, Kruse said. “People don’t like to hear that word since it brings up all sorts of bad connotations, but it really is a powerful tool,” he said. For the debtors, it provides the ability to restructure debt, the opportunity to assume favorable contracts and reject unfavorable ones, and most importantly, it gives them some breathing room. Purchasers in such a sale can acquire an asset free of any liens, claims and encumbrances pursuant to the court order. They also have the chance for debtor-inprocess ﬁnancing, where they can give the business a trial run, Kruse said. A sale in bankruptcy can be completed over creditor objections and avoids the risk that the transaction may be characterized as a fraudulent transfer. Kruse outlined the two types of sales within a bankruptcy: a Section 363 auction sale and a sale pursuant to a Chapter 11 reorganization plan. In a Section 363 sale, a debtor ﬁles a motion to approve a proposed sale, which typically includes attaching bid procedures governing the process and an asset purchase agreement. All creditors receive notice of the sale and have an opportunity to object. A potential purchaser could become a “stalking horse” bidder. “A stalking horse bidder can control the process more. You can go with a very substantial bid and shut everyone else out,” Kruse said. “But if you’re not worried about acquiring the property at all costs, being a stalking horse isn’t the way to go.” A Section 363 can usually be completed faster than a sale pursuant to a Chapter 11 reorganization plan. However, a sale pursuant to a plan allows a purchaser to be more in control and avoids the uncertainty of an auction. Approval of a sale depends on conﬁrmation of the debtor’s underlying reorganization plan. These sales take considerably longer and can ultimately be rejected by creditors or parties-in-interest. Another option is a sale pursuant to a prepackaged Chapter 11 where the terms of the sale is ﬁled simultaneously with the bankruptcy petition, disclosure statement and other restructuring documents. Prepackaged plans, Kruse said, can limit the time and expense of the typical Chapter 11 reorganization. Such a sale works well when there is a willing purchaser and seller prior to the bankruptcy ﬁling, and a lending institution is on board, he said. It avoids competing plans of reorganization which may be ﬁled by parties other than the debtor. Another possibility, but one Kruse said he wouldn’t recommend, is attempting to bid after an auction. It can be hard for the court and trustees to turn down a signiﬁcantly higher bid, even if it didn’t come through the normal process. On the other hand, the court may turn the bidder down because they didn’t participate in the process, Kruse said. We want your feedback. Send comments and inquiries to BioEditor@sosland.com. For reprints of BFB articles, e-mail reprints@sosland.com August 2011 I BIOFUELS BUSINESS I www.BioFuelsBusiness.com http://www.BioFuelsBusiness.com

Table of Contents for the Digital Edition of Biofuels Business - August, 2011

Biofuels Business - August, 2011
CONTENTS
Growing in a recession
CALENDAR OF EVENTS
BIOFUELS BUSINESS NEWS
BIOFUELS MARKET REVIEW - Wheat
COUNTRY FOCUS - Focus on Costa Rica
FEATURE - Making the Deal
PRODUCTS & EQUIPMENT
SUPPLIER NEWS
AD INDEX

Biofuels Business - August, 2011