Selling a Business in Chapter 11: 363 Sales and Stalking Horse Bids
/Sometimes the best outcome of a Chapter 11 case is a sale of the business, or its main assets, rather than a plan that keeps current owners in place. Bankruptcy courts can approve a sale quickly and transfer the assets free of most claims, which is why buyers are often willing to pay more in a case than outside one.
How does a 363 sale work in bankruptcy?
The debtor asks the court to approve a sale outside the ordinary course of business (11 U.S.C. § 363(b)). The court first approves bidding procedures, often with a stalking horse bid. The assets are marketed, competing bids go to an auction, and the court approves the winning bid in a sale order. Assets can be sold free and clear of liens if one of the conditions in § 363(f) is met, for example the lienholder consents; the sale order usually attaches the liens to the proceeds.
Typical sequence:
- Prepare: valuation, a data room and a list of buyers.
- Bidding procedures motion: the timeline, bid requirements and any stalking horse protections.
- Marketing period: buyers do diligence and submit qualified bids.
- Auction: if more than one qualified bid arrives.
- Sale hearing: the court approves the sale and finds the buyer acted in good faith.
- Closing: proceeds are distributed under the sale order or a plan.
What is a stalking horse bid?
A stalking horse is the first, binding bid that sets the floor price for the auction. In exchange for doing diligence first and being outbid, the stalking horse usually receives bid protections approved by the court, such as a break-up fee and expense reimbursement, if another buyer wins.
Worked example (illustrative figures)
A stalking horse agrees to pay 4.0 million, with a break-up fee of 3% (120,000) and a minimum overbid increment of 100,000. The first competing bid must therefore be at least 4.22 million: the stalking horse price, plus the break-up fee, plus one increment. If a competitor wins at 4.6 million, the estate pays the break-up fee from the proceeds and keeps 4.48 million, 480,000 more than the stalking horse price.
How is the business valued for a sale?
The auction sets the final price, but a valuation tells the company, the lender and the court whether bids are reasonable. The usual methods are comparable transactions, comparable companies and discounted cash flow, with liquidation value as the floor. A secured lender can bid its debt instead of cash ("credit bid"), which affects strategy (§ 363(k)).
The financial work in a sale
- Valuation and the range of reasonable outcomes
- The financial data room and buyer diligence
- The cash budget through the sale process
- Comparison of the sale with a standalone plan
- The flow of funds at closing: lenders, cure costs, fees, the estate
Questions owners ask
Is a 363 sale faster than a plan? Usually. A plan needs a disclosure statement and a vote; a sale needs bidding procedures and a sale hearing.
Can current owners buy the business back? Sometimes, but insider bids face close scrutiny and must win a fair process.
What happens to contracts and leases? The debtor can assume contracts and leases and assign them to the buyer if defaults are cured (or will promptly be cured) and the buyer gives adequate assurance of future performance. Some contracts cannot be assigned without the other party's consent (§ 365).
Our team's experience includes $125B+ of telecom and media M&A. Related: Plan financials and valuation · M&A & Exits
General information, not legal advice.