Acquisition of a Franchisor, or Its Assets, Through a Bankruptcy Proceeding

• Author: Glenn D. Moses
• Pages: 249-274

I. INTRODUCTION

The economic conditions resulting from the sustained nancial downturn

have created opportunities for investment in businesses at exceptional

values. There have been, and continue to be, numerous companies in

nancial distress that seek to sell their assets or businesses in order

to stave off foreclosure and related litigation. As discussed herein, a

Chapter 11 bankruptcy presents buyers and sellers with the necessary

tools to maximize the value of a distressed merger and/or acquisition

transaction. In connection with a bankruptcy proceeding, well‑informed

purchasers are able to “cherry pick” desirable assets from an acquisition

target while leaving behind over‑leveraged balance sheets and unfavor‑

able contracts and leases.

The franchising sector has not been insulated from the economic

downturn. In recent years, many franchisors have sought relief under

the bankruptcy code, and a number of those seeking such relief have

either sold their assets or restructured their nancial affairs through the

bankruptcy process. Strategic and nancial buyers of franchise compa‑

nies therefore need to understand the respective benets and risks of

acquiring distressed businesses in a bankruptcy proceeding.

This chapter is broken up into two sections. The rst part addresses

bankruptcy sales in general—either through a motion and auction pro‑

cess or through a traditional plan of reorganization—and the relative

249

Acquisition of a Franchisor, or

Its Assets, Througha Bankruptcy

Proceeding

Glenn D. Moses

8

Vines_Mergers_20140521_13-42 FINAL.indd 249 6/3/14 1:26 PM

benets thereof. The second section discusses the nuances, concerns, and risks

as they relate to the acquisition of a franchisor’s intellectual property and con‑

tractual rights, often the most valuable assets of the franchisor.

A. Note on Due Diligence

While a comprehensive due diligence investigation is always advisable, it is often

not possible when dealing with a nancially troubled company that is forced by

its current circumstances to complete a transaction quickly. Companies some‑

times wait to discuss acquisition alternatives until they are in the midst of a

liquidity crisis. Other companies face a nancial crisis caused by some unan‑

ticipated event. The net result is that nancially troubled companies often nd

themselves working under tight deadlines and needing to complete a transac‑

tion quickly. Purchasers should obviously tread carefully when asked to conduct

expedited due diligence. While the prospect of acquiring a company or its assets

at an attractive price may be appealing, prospective purchasers should take the

time to make an informed decision and understand the risks of the transaction

and not just the potential rewards.

II. ADVANTAGES OF CHAPTER 11 SALES

Generally, the sale of a company’s assets or business in bankruptcy is accom‑

plished in two ways: (1) through a sale by motion—typically in connection with

a court approved auction—pursuant to section 363 of the Bankruptcy Code

(a “363 Sale”); or (2) by through a plan of reorganization (a “Plan”). An auction

conducted under a 363 Sale is generally an expeditious process used to acquire

assets that are rapidly losing value. In contrast, buying a business through a Plan

is a more deliberate and time‑consuming process including the development of

a plan of reorganization, soliciting votes on the plan, and conrming the plan

pursuant to a court order.

For a prospective purchaser or investor, Chapter 11 sales—whether through

a 363 Sale or a Plan—are highly attractive for a number of reasons, as described

below.

A. Sales in Bankruptcy Are Generally Free and

Clear of Liens, Claims, and Interests

Perhaps the most signicant benet provided by a 363 Sale or sale under a Plan

is that the purchaser can generally acquire the company’s assets free and clear of

substantially all interests and claims. In particular, section 363(f) of the Bankruptcy

Mergers & Acquisitions of Franchise Companies, Second Edition250

Vines_Mergers_20140521_13-42 FINAL.indd 250 6/3/14 1:26 PM