Too Much Debt to Sell Your Business? Now There Is a Way With the Liquidating Subchapter V Chapter 11

Let's say you're trying to sell your business but your buyers are running scared because they see all the debt on your books. They might be particularly concerned about creditors who have liens on the business assets; the amount of money they perceive it would take to satisfy those liens and get title to those assets might appear to be too ominous.

Recently, at Julianne Frank, Esq. we were able to successfully confirm one of the first liquidating Subchapter V Chapter 11 cases in Florida. Using that tool, we were able to successfully sell a business that had all of the problems described above.

Normally, Chapter 11 is used to reorganize and rehabilitate businesses that want to keep operating but are in financial trouble. These usually end with a plan where the company has to pay back a portion of its debt to its creditors over time. Sometimes a business doesn't want to reorganize; it just wants to be sold. That is where the liquidating form of Chapter 11 comes into play.

The process begins with a potential buyer willing to buy the business for distressed value, with the proviso that the buyer wants to make sure it gets the assets or the business itself, free and clear of all liens, encumbrances, and debts. The buyer signs a contract that has a contingency in it: the closing of the deal is contingent upon the seller filing a liquidating bankruptcy, and the bankruptcy court approving the sale to the buyer free and clear. Then, the seller files Chapter 11 bankruptcy that is denominated as a "liquidating", rather than reorganizing, bankruptcy.

Next, the court conducts an open auction where any party wanting to offer more to the seller/debtor can come before the court with a competing bid. If there are no competing bids, the original offer wins, and the court issues an order transferring the business or its assets to the buyer free and clear. If structured properly, and the buyer making the opening offer does not win the bid, the buyer can get their costs back for having participated and initiated the bidding process.

There does not have to be enough money in the deal to pay off the lien holders; there just has to be enough money to represent the highest and best value that anybody would be willing to pay for this business under its distressed circumstances.

What is Subchapter V?

Subchapter V is actually a subchapter of Chapter 11 that Congress adopted in 2021. It is a simplified and expedited process for saving small businesses, and now, we have successfully used it to liquidate a small business. If you have access to bankruptcy cases, you can review the case and see it unfold and reach a successful conclusion: In re Masters III LLC Case # 23-14750MAM Southern District of Florida Bankruptcy Court.

If you are trying to unload your distressed business but believe it has too much debt to interest buyers, you should further investigate the Liquidating Subchapter V Chapter 11 process. Julianne Frank, Esq. can help guide you through this process. Call us today.

Julianne Frank June 2024