Voluntary Receivership: An Overlooked Option for Obtaining a Going Concern Premium in a Business Sale

Many Wisconsin business advisors fail to consider using a receivership under Wisconsin’s Chapter 128 as a tool for selling a going concern business. Yet, in many instances, it is the optimal method for such a sale.

For the past 15 to 20 years, Wisconsin lenders have used Chapter 128 receiverships to sell going concern businesses. A Lender, however, may only compel such a receivership when it can demonstrate that the borrower is insolvent on a modified balance sheet basis.

In contrast, any business may, at any time, voluntarily subject itself to a Chapter 128 receivership. There is no insolvency requirement.

A business sale under Chapter 128 differs markedly from the traditional sales process. The traditional sales process, often driven by a broker, involves the selection of a single buyer, the exchange of letters of intent, the negotiation of a purchase agreement, a prolonged due diligence process, often renegotiation and, hopefully, a closing. That can take six to eight months. A receivership sale, on the other hand, quickly creates a competition among multiple prospective buyers. Due diligence is more abbreviated because the successful buyer obtains a court order that ensures the buyer obtains the assets free of all claims. The purchase agreement is far simpler.

Consider the following real world example. A small foundry had been in business for over 60 years. For the past several years, it lost money and had negative EBITDA. The owners had advanced substantial personal funds to make ends meet. The company had a small but consistent customer base. Sales were, however, much lower than before the recession. The company had a skilled workforce and older, but serviceable, equipment. The company owned its facility. The owners had reached retirement age. They were unable or unwilling to contribute more personal funds, yet that would almost certainly be necessary to make it through an ordinary course sales process.

I was appointed receiver at the request of the foundry’s owners. A business consultant and I immediately undertook a vigorous sales and marketing process. Multiple prospective buyers competed for the purchase. I signed 21 confidentiality agreements with prospective buyers and, within six weeks, I entered into a stalking horse agreement. We shopped that agreement, held an auction among the final prospects, and sold the business for a substantial premium over liquidation value.

The receivership petition was filed on March 24, 2017, and the closing occurred less than two months later on May 19, 2017. All creditors were paid in full, and the owners received substantial equity payments. Moreover, the owners were not required to infuse any additional dollars into the company. We were able to defer paying secured creditor principal payments and payments to pre-receivership trade creditors until the sale was completed.

We would be happy to work with you and your client to explore whether a Chapter 128 sale would work for your client.

If you have any questions regarding this article, please contact its author, John Wirth, at 414-727-6276 or jwirth@mzmilw.com.

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