Four tips for saving a bankrupt business

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With distressed assets, the loss of one investor can be the gain of another.

Robert Lomison has worked in the funeral industry for nearly four decades, building his fortune by purchasing poorly run cemeteries and funeral homes. One of his notable acquisitions was a collection of distressed funeral homes and cemeteries in central Texas.

Bruce Deifik saw a different opportunity to raise a business from the dead. He bought the Revel Casino in Atlantic City, which opened in 2012 but had gone bankrupt.

Buying a bankrupt business might sound like a good deal. But it’s a risky investment, even in a booming economy. After all, someone else tried with the same company and failed.

If new owners are notified, they could make a huge return on their investments. But sometimes they are lucky enough to strike a balance or escape without going bankrupt themselves.

Bankruptcies are at a low point, but given the amount of debt that companies have borrowed at low rates that will eventually increase, the number of bankruptcies and distressed sales is expected to increase.

“Anyone who wants to make money buying companies out of bankruptcy must have a stomach that can digest anthrax,” said Scott H. McNutt, founder and director of the McNutt Law Group, which focuses on insolvency.

The opportunity for a buyer is that any stake in the business owned by former investors is wiped out by bankruptcy. Banks that hold debts on the business will accept less than what is owed to them. Still, the process takes time and a lot of money.

“If you want to buy something from a bank, you have to hire lawyers and accountants, and you usually have to produce a valuation methodology that justifies your price,” McNutt said. “You also have to overcome the objections of people who are devastated. That said, if you have a lot of capital and a strong stomach, sometimes this is an opportunity.

This opportunity calls for both prudence and strategy. Here are some takeaways from people who invest in failed businesses and who have survived to tell their story.

Mr Lomison saw an opening with a group of three funeral homes and two cemeteries in Texas that he said had been mismanaged.

“Families were buying something – funeral markets, tombstones, burial vaults – and they didn’t deliver it for six months,” he said. “Families were at the gates to protest. “

Mr. Lomison paid $ 800,000 for a $ 4.6 million loan in default. But he knew this was only the beginning of his investment. He was to give the customers the tombstones and markers they had purchased. He also upgraded a fleet of limousines and hearses.

That was 10 years ago, and now he’s realizing the ROI. “It’s a slow process,” he said. “It’s not something that happened overnight. It was client by client.

Yet he knew the space, having bought and sold some 45 funeral homes and cemeteries during his career. He also knew that well-run funeral homes and cemeteries were very profitable.

Some investors in distressed properties find expert partners.

Ivan Q. Zinn, chief investment officer of Atalaya Capital Management, a $ 3.5 billion private equity fund, said he has partnered with a Colorado real estate investor to buy properties at a great price. He said he could only do it by having someone with in-depth knowledge of the market.

“He really adds value in the context of his role as a field operator,” Zinn said of his partner, Andrew R. Klein of Westside Investment Partners. “He can understand how something can move from one type of operator to another and know what these residential land should be traded for.”

Mr. Klein gave the example of a 700,000 square foot building that they recently purchased where the main tenant, occupying 400,000 square feet, was moving out. It would be unattractive, if not disastrous, for many homeowners. But for Klein, “it’s about managing that risk,” he said.

“The big false indicator is how much money others have already lost,” McNutt said. Buyers think it’s an indicator of value, but it often isn’t. Distressed properties often require more investment.

The Revel Casino, at the north end of the Atlantic City Boardwalk, cost more than $ 2.4 billion to build. Mr Deifik paid $ 200 million to buy it out of bankruptcy and then spent another $ 200 million to update it. It plans to reopen it on June 28 as the Ocean Resort Casino.

“I bet this is a great buy,” Mr. Deifik said. “My operating expenses are significantly lower than those of the group which opened it in 2012.”

But someone else has tried before him. Previous owner Glenn Straub, a well-known owner from Atlantic City, paid less than $ 90 million and reportedly spent $ 1 million per month for two years to cover his costs.

Mr Deifik was granted a casino license on Thursday, just a week before the casino’s scheduled opening. He knows he still has a lot of work to do. He still faces an annual payroll of $ 115 million. But he is optimistic: he intends to complete 12 unfinished floors and increase the number of rooms to 2,000 from 1,400.

“If we give the customer what they want, if we deliver a high level of service, I think the casino has an opportunity to rise,” he said.

Sandy and Jim Cannon bought Geets Diner in Williamstown, NJ from bankruptcy last year, each having gone there as children. The restaurant, on the Black Horse Pike between Philadelphia and the Jersey Shore, dates from the 1940s. But it fell into disrepair before it went bankrupt in 2017.

“The previous owner owed everyone from the people food and drink to the IRS,” Cannon said. “He was in bad shape. “

The company’s economy had fallen so badly that it had to compete with a buyer who wanted to demolish the restaurant and redevelop the land.

The couple paid $ 3.9 million for the property, based on the restaurant’s reputation and its location at a busy intersection. Engaged in the restoration of the property, they embarked on the renovation and re-establishment of relations with suppliers.

Still, Mr Cannon said their philosophy since reopening in March has been to just try. “We kind of fell into it,” he said. “We did not anticipate this.”

One of the risks of buying a bankrupt business is that paying off debt may not be enough to make the business profitable. It might just make it less profitable, McNutt said.

“It’s like the old rule about buying vintage cars,” he said. “Just because a dermatologist wants to spend $ 150,000 to restore his old Ladybug doesn’t mean it’s worth $ 150,000. This means that a dermatologist had $ 150,000 and wanted to spend it on his old Beetle.

So what should buyers do? Hire experts and embrace the whiteboard.

That’s what Peter Patel did when he bought a coal mine outside of Pittsburgh.

At the time, Mr. Patel had experience as the owner of pharmaceutical companies and hotels. He had never owned or even worked in a coal mine. But when he got a call in 2016 to buy one, the opportunity made sense to him. The mine had failed for two reasons: mismanagement, caused by fighting between partners, and a collapse in coal prices.

Mr. Patel bought the mine for $ 5 million at a time when coal was trading between $ 80 and $ 90 a tonne. He upgraded the equipment by purchasing new parts from other struggling businesses. And he brought in a marketing team to find new markets for the coal. Then the price of coal started to rise, topping $ 300 per tonne.

Mr Patel said his lack of knowledge about coal was no obstacle.

“The most important thing I understood was that every industry needed a structure and you had to stick with a business plan,” he said. “More often than not, a business is not well organized and we do not stick to the plan.

He is looking to buy a second mine in Arkansas. “You have to stay focused no matter what is going on,” he said. “With an asset in distress, a lot of problems happen to you. “

This is good advice for any business.


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