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

AuthorGlenn D. Moses
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
Acquisition of a Franchisor, or
Its Assets, Througha Bankruptcy
Glenn D. Moses
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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.
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
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
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