Distressed M&A And Section 363 Sales: A Strategic Guide For Texas Business Owners

When a Texas business is facing financial difficulties, it’s natural to want to cut expenses, keep all the assets and wait for a recovery. However, when a company faces distress, time may be short.

A loan that is coming due, a violation of a debt agreement, a lawsuit or other legal action or a significant change to operations can rapidly deplete cash reserves and limit the number of options available to the business owner.

For small- and middle-market companies in Dallas-Fort Worth, Houston, Austin and San Antonio, a working knowledge of distressed mergers and acquisitions (M&A), debtor-in-possession (DIP) financing and Section 363 sales could make all the difference between preserving enterprise value and losing it.

What Is Distressed M&A and Why It’s Important to Mid-Market Companies in Texas?

Distressed M&A involves selling, merging or divesting a business or a portion of its assets while it is still operating but facing financial difficulty.

Because distressed M&A transactions have shorter timelines, involve more stakeholders and may involve an imminent risk of insolvency or bankruptcy, they are different from normal M&A transactions.

A distressed seller could be struggling with low cash flow, violation of debt covenants, or the demands of creditors, whereas a distressed buyer could see an opportunity to purchase assets, clients, intellectual property, or other components of the business at a lower price.

For Texas middle-market companies, distressed M&A represents an important strategic option.

In Texas, we have a diversified economy in sectors such as energy, health care, real estate, manufacturing, technology and consumer products, and there are many companies in Texas and around the country with the ability to purchase assets or whole companies at distressed prices.

When structured properly, the proceeds of a distressed sale can help pay off creditors, save jobs and maintain the enterprise value that would otherwise be lost through an orderly liquidation.

To do this successfully, however, an experienced and credible financial advisor must engage with management to properly position the business and its financial statements and to ensure appropriate communications with relevant parties.

John Tittle, Jr., the founder of Tittle Advisory Group, has experience as a CEO and public company CFO and was a partner at Deloitte before becoming an entrepreneur and buying, selling and taking companies public.

Section 363 Sales: A Powerful Weapon in the Bankruptcy Code

Under Section 363 of the United States Bankruptcy Code, a company undergoing Chapter 11 bankruptcy can sell its assets outside of the ordinary course of business upon obtaining a court order.

Section 363 sales offer a number of benefits to a Texas company seeking to sell assets to raise funds, maximize proceeds and satisfy creditors’ interests.

The Section 363 sale can allow a buyer to acquire assets free and clear of liens, claims and encumbrances, meaning that the buyer will not take on any liabilities associated with the business.

The court-supervised nature of the process adds to the transparency and finality of the deal, and a streamlined process can help the company preserve value and liquidity if it is at risk of running out of cash.

Notice must be given to creditors; there must be a competitive process; and there must be a finding that the sale was the highest and best offer.

The debtor has to show that it exercised good business judgment, creditors have standing to object, and the US trustee’s office watches over the process to ensure it is done right.

This takes a sophisticated understanding of both bankruptcy law and M&A principles.

That’s why Tittle Advisory Group is led by its principal, John Tittle, who is personally involved in each process he leads.

He holds the Certified Insolvency and Restructuring Advisor (CIRA) and Certified Distressed Business Valuator (CDBV) designations.

DIP FINANCING: FINDING LIQUIDITY WHEN THE PIPELINE IS LOW

When a business files for Chapter 11 bankruptcy, the company’s current lenders may cut off its line of credit, while the business burns through its available cash.

A debtor-in-possession (DIP) loan is financing provided in a reorganization case that’s secured, court approved, and intended to keep the business running during the restructuring process.

A DIP loan might include new money, a rollover of existing debt, or a combination of the two, and it generally comes with a super-priority lien and an adequate protection agreement.

Potential lenders will analyze the business’s going-concern value, the collateral on which it’s based, the business plan, and the likelihood of a successful exit via reorganization, a Section 363 sale, or a liquidation.

For Texas companies, regional banks, asset-based lenders, and private credit funds are likely to be valuable partners.

TAG works with debtors and their counsel to prepare a DIP financing request, negotiate its terms, and present a compelling case to the court.

Its experience conducting rapid financial assessments will help ensure that its analysis is defensible, the company’s milestones are clearly defined and measurable, and the overall execution of the plan is highly disciplined.

DUE DILIGENCE IN DISTRESSED TRANSACTIONS: PREPARING FOR THE WORK

Buyers and sellers of distressed assets must prepare differently for due diligence than in a traditional M&A transaction.

The timeline for a buyer’s review period is compressed, and the seller’s financial records might be incomplete or otherwise unavailable.

The seller needs to put its best foot forward in selling the business while also satisfying its obligation to make full disclosures to its creditors.

For the seller, preparation starts with a rapid financial assessment — a 13-week cash flow forecast, normalized financial statements, a list of assets and liabilities, and a viable business plan going forward.

A buyer should look closely at what it’s acquiring: the assets, any potential successor liability if the transaction isn’t conducted under Section 363, customer relationships and contractual arrangements, physical assets, and working capital.

Tittle Advisory Group works with both sides of a transaction.

TAG prepares the seller’s financial package, coordinates with the seller’s legal counsel, and handles communications with the various stakeholders.

For buyers and lenders, TAG performs its own independent diligence, reviews the company’s projections, and advises on the company’s enterprise value.

John Tittle’s 100-plus appearances as an expert witness since 1983 brings courtroom-tested credibility.

STAKEHOLDER MANAGEMENT: THE HUMAN ELEMENT OF DISTRESSED TRANSACTIONS

Distressed transactions involve multiple stakeholders: secured lenders, unsecured creditors, landlords, vendors, employees, equity holders, and possibly even regulators.

Each party will have its own perspective on what the outcome should be, and each expects a different result.

Managing them requires clear communication and credibility.

In Texas, many business relationships have a personal and community dimension.

Creditors often know the owner for years, landlords need to understand their exposure, and employees want to know how this will impact them.

The financial advisor has to navigate all of this friction, bring objectivity, and move things along toward maximum value realization.

John Tittle’s tenure as a court appointed trustee, receiver, and chief restructuring officer allows him to act as a decision maker as well as an analyst, bringing orderly, transparent and defensible decision making.

Common Questions

How is a distressed sale different from a 363 sale?

A distressed sale is simply the sale of a business that is in trouble, and may or may not involve bankruptcy. A Section 363 sale is a sale of a company in Chapter 11 bankruptcy that allows for court oversight, structured bidding, and the ability to sell free and clear of any encumbrances.

How long does a 363 sale take?

In many cases, a 363 sale can be completed within 60 – 120 days after the bankruptcy petition is filed, though very illiquid companies may require only 30 – 45 days to complete the sale. A sale should be prepared ahead of the bankruptcy filing when possible.

Can I choose the buyer in a distressed sale?

In an out of bankruptcy scenario, the owner has significant discretion over the buyer so long as the lenders and other secured creditors agree. In a 363 sale, the debtor may propose a buyer or stalking horse, but other qualified bidders may come forward and compete, and the Court will focus on maximizing value of the estate.

What is DIP financing? When is it needed?

DIP Financing is secured financing for a company undergoing reorganization in Chapter 11 that has been approved by the Court. When a company cannot pay its employees, vendors and other operating expenses with available cash, DIP financing is likely necessary.

How does Tittle Advisory Group charge for distressed M&A services?

Fees for distressed M&A services vary based on the size and complexity of the engagement and the specific needs of the client. Tittle Advisory Group does not publicly disclose pricing for its services, but will prepare an engagement proposal for each new client following a confidential consultation.

Bottom Line: Get Help Early to Preserve Value

The biggest mistake Texas business owners make in a distressed M&A situation is waiting too long to bring in financial experts.

Every week that a business owner delays engaging financial leadership, enterprise value is lost to declining liquidity, departing employees, loss of customer confidence, and impatient creditors.

Whether a company sells its business through a negotiated sale, a Section 363 transaction, secures DIP financing or implements a restructuring plan, acting sooner rather than later is always better.

Tittle Advisory Group provides distressed M&A advisory services, capital solutions and 363 sale support to mid-market businesses in Texas.

With a background in the Big Four, operational experience in public companies and over 100 qualifications in courtrooms across Texas, John Tittle, Jr. personally handles every engagement.

Contact John Tittle, Jr. for a confidential consultation at tittlefinancial.com or (214) 341-6043.