In the wake of the economic downturn that began in 2008, several of America’s best-known brands have filed for bankruptcy protection. Click here for a slideshow presenting 15 household names that invoked the protections available in bankruptcy court during the downturn. Continuing economic uncertainty may cause more famous brands to seek bankruptcy protection, opening up opportunities for purchasing and reviving well-known brand names.
While filing for bankruptcy was, at one time, a major stigma for a company, commentators suggest that this attitude is waning. The increased acceptance of bankruptcy as a tool available to struggling companies and the ubiquity of bankruptcy filings involving brand names led CNN to recently observe that brands survive bankruptcy.
“In times past, a bankrupt brand might have been abandoned. But today, bankrupt brands represent a new business opportunity for companies to acquire a well-known name for below-market value and revive it. With the expense of launching a new brand, it may in fact be cheaper to keep a bankrupt brand going, as long as it can remain viable, fresh and current,” writes brand consultant Barry Silverstein in his article After the Fall: What Really Happens to Bankrupt Brands.
Both financial and strategic buyers can benefit from purchasing brands out of bankruptcy. For example, major asset liquidators have created value by purchasing the intellectual property of well known brands and licensing that intellectual property for use by others. On the strategic side, opportunities may arise among businesses with pre-existing relationships. In an interesting example, a Chinese manufacturer that was the largest unsecured creditor of sofa-bed distributor Jennifer Convertibles purchased the company out of bankruptcy, turning its unsecured claim into a significant portion of the purchase price and achieving vertical integration.
Among the primary benefits to purchasing a brand in a bankruptcy sale is the potential to pay a purchase price that is below the brand’s market value outside of bankruptcy. Certain parties who otherwise may have been interested in purchasing the brand may be frightened away by the idea of completing the transaction in bankruptcy, and the resultant decreased competition may lower the purchase price. Further, a brand owner’s expectations as to the value of its brand, as well as the expectations of its creditors and the market at large, may be reduced by the circumstances that led to the bankruptcy filing in the first place.
By purchasing a brand out of bankruptcy, a buyer may be protected from certain transaction risks. For example, court approvals required to consummate a bankruptcy sale typically include findings that insulate a transaction from fraudulent transfer actions brought by creditors on the theory that the transfer was for less than reasonably equivalent value. Additionally, once a sale has closed, objecting parties will likely have limited recourse to attempt to undo a transaction that has been approved by the bankruptcy court.
Bankruptcy sales present savvy buyers with opportunities to purchase brands outside of more traditional acquisition contexts. While some buyers may be frightened away by the complexities and presumed risks of completing a transaction in this environment, buyers who retain talented and experienced insolvency professionals and participate in bankruptcy sales can reap substantial rewards.
Ultimately, the key to successful brands comes down to differentiation in the marketplace, and while poor differentiation may lead to financial distress, a creative purchaser may still find value in a brand in bankruptcy. According to John Gerzema, author of The Brand Bubble, “The key is to reshape a business model around the brand’s strongest points of differentiation, or invent new ways of being different.”