The successful sale of TabBand shows that even a bankrupt company in a tough
economy can bring top dollar ... in a "Fox & Fin Deal."
By
Jim Afinowich
July 2010 —
In the summer of 2009, Fox & Fin Financial Group was retained to facilitate the
sale of a company in U.S. Bankruptcy Court. The company – TabBand, a Phoenix
manufacturer of hospital and crowd-control wrist bands and animal ID collars –
had filed for bankruptcy under Chapter 11.
The situation was atypical in that the company, despite being in bankruptcy, was
profitable under the management of a majority shareholder and the supervision of
the bankruptcy trustee.
The financial distress that pushed TabBand into bankruptcy had resulted from the
use of company funds to capitalize a second business venture launched by
TabBand’s majority shareholder. When the second venture faltered and was unable
to repay the funds as planned, it placed TabBand in an unwinnable financial
situation despite the company’s accrued profits.
Short on cash, the company was unable to meet its federal income tax
obligations, eventually forcing the company into bankruptcy and leaving the
Court and the trustee with a difficult choice:
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allow TabBand to continue under the
management of the majority shareholder, who, despite draining the company’s
cash in support of the second venture, had also run TabBand profitably; or
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remove the majority shareholder, thus risking a management vacuum that might
undermine the company’s success and continued profitability during the
receivership period.
The final decision was to retain the majority shareholder in a management roll
on a month-month basis, under the supervision of bankruptcy trustee David
Birdsell, until the business could be sold. That decision proved to be
beneficial in a number of ways, e.g., ensuring that information integral to
TabBand’s operations was available throughout the due diligence process.
Court Turns to Fox & Fin. In the early stages of the bankruptcy, one of
TabBand’s minority shareholders had offered to buy the company for $800,000. In
most cases, the bid would likely have been accepted and the story would have
ended there. However, the Court and the trustee believed that the company was
worth significantly more than that, and on September 29, 2009, Fox & Fin was
retained as the M&A advisor and charged with maximizing the sales price and
facilitating the bankruptcy auction.
Under the direction of Jim Afinowich, Fox & Fin’s co-founder and designated
broker, Fox & Fin began an in-depth research process that led to the production
of a “confidential business review” – a comprehensive package provided to
prospective buyers upon execution of a confidentiality agreement. The review
typically outlines the business’s history, personnel, strengths, weaknesses,
marketing, facilities and finances. While such a comprehensive prospectus
generally is not provided in bankruptcy cases, Fox & Fin adhered to a core
principle that accurate and comprehensive information is essential when creating
an auction environment for a business sale.
After several months, during which Fox & Fin marketed the TabBand through a
variety of methods (learn more about the Fox &
Fin Process™), 85 prospective buyers were identified, screened and provided
copies of the confidential business review. Prospective bidders were given a
deadline to submit to the trustee a preliminary bid, accompanied by a $50,000
earnest money deposit. When the deadline came, 14 bidders had filed their
initial bid price, along with their $50,000 deposit. The 14 bidders were then
given four weeks to perform their due diligence and to adjust their bid price,
if appropriate.
Bidding Process. As part of the due diligence process, bidders reviewed
company information and negotiated a final purchase contract with the trustee’s
counsel, Phoenix bankruptcy attorney Terry Dake.
By the end of the due diligence period, three distinct types of bidders had
emerged:
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those who bid a price based on the company’s
merits;
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those who withdrew their bids, and
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those who placed an extremely low bid with the sole intent of gaining the
ability to participate in the bankruptcy auction at the very end of the
process.
Because this sale was to be consummated in Bankruptcy Court, the process was
somewhat different than a traditional sealed bid process. At the completion of
the due diligence period, any bidder who had placed a bid, deposited earnest
money with the trustee, and signed a no-contingency contract accepted by the
trustee and his attorney were given a second and final opportunity to acquire
the business, in court, at live auction. Other bidders were allowed to place a
bid during the court auction, provided they made an earnest deposit and were
willing to sign a no-contingency contract in a form already approved by the
trustee.
Of the 14 original bidders, five left their earnest money on deposit with the
trustee and went to court to participate in the final bidding. Before the final
day in court, the highest bidder in the original round had lowered his bid below
the amount of the second-highest bidder; however, he still showed up to bid,
knowing he would have to overbid the then-highest bidder and would likely pay
something close to, or greater, than his original bid. Other parties, who had
bid only slightly more than half the high bid, also showed up to bid. These
bidders were like poker players who didn’t want to show their hands until they
could see what the other player had. From the beginning round of bidding prior
to due diligence, to the starting bids in Court, the highest bidder had dropped
his bid by $425,000, while the lowest bidder had raised his by $300,000.
Complications. Because this was a bankruptcy sale, the price was affected
by multiple issues that would not have been a factor in a traditional business
sale. For example:
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Buyers typically require a non-compete
agreement from the sellers. But in this case, with only the company’s assets
being sold, the bankruptcy judge did not impose that requirement on
TabBand’s owners. Thus, the bidders had to accept the likelihood that, at
some point, they would be competing against the sellers. The judge did agree
that she could require the selling shareholders to sign a confidentiality
agreement, and this compromise was accepted by most bidders.
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One of the company’s products was patented. The patent was registered in the
name of one shareholder, who believed he was the lawful owner of the patent.
Another shareholder objected, noting that, since the costs associated with
obtaining the patent were paid by the company, the patent was the company’s
rightful property. The judge ruled that the determination of patent rights
was not part of this proceeding and that the buyer would receive whatever
patent rights the company owned. Uncertainty over the ownership of the
patent, and the possibility that the patent would not be among the assets
being purchased, proved to be a dampening factor on the ultimate selling
price. Some bidders were so concerned about this issue that they withdrew,
while others were not concerned and stayed in.
Despite these and other unusual circumstances, in the end there were still
multiple bidders. Once the bidding started, the Court dictated the minimum bid
increase would be $25,000 at a step. With all the maneuvering and jockeying for
position, the opening bid was $1.1 million. From that point the bids went up
$25,000 at a time until, thanks in part to the competitive process stimulated by
Fox & Fin’s marketing strategies, the final bid was accepted at $1.325 million,
or 66% higher than the amount offered prior to the systematic process executed
by Fox & Fin.
The successful sale of TabBand offers a valuable lesson for trustees, bankruptcy
attorneys, debtors-in-possession and other parties to commercial bankruptcy:
that, even in a tough economy, a bankrupt company that owns valuable assets can
still bring top dollar … in a “Fox & Fin Deal.”. |
