Home Money Four Tips on How to Rescue a Bankrupt Business

Four Tips on How to Rescue a Bankrupt Business

41
0

With distressed assets, one investor’s loss can be another’s gain.

Robert Lomison has worked in the funeral business for nearly four decades, building his wealth buying mismanaged cemeteries and funeral homes. One of his standout acquisitions was a collection of struggling funeral homes and cemeteries in central Texas.

Bruce Deifik saw a different opportunity to resurrect a business from the dead. He bought the Revel Casino in Atlantic City, which opened in 2012 but had fallen in and out of bankruptcy.

Buying a business out of bankruptcy might seem like a good deal. But it is a risky investment, even in a booming economy. After all, someone else tried with the same business and failed.

If the new owners are savvy, they stand to make a considerable return on their investments. But sometimes they are lucky to break even 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 rise, the number of bankruptcies and distressed sales is expected to climb.

“Anyone who wants to make money by buying businesses out of bankruptcy has to have a stomach that will digest anthrax,” said Scott H. McNutt, founder and principal of the McNutt Law Group, which focuses on insolvency.

Some investors in distressed properties find partners with expertise.

Ivan Q. Zinn, the chief investment officer of Atalaya Capital Management, a $3.5 billion investment fund, said he formed a partnership with a real estate investor in Colorado to buy properties at a steep discount. He said he could do that only by having someone there with a deep knowledge of the market.

“He’s really adding value in the context of being the on-the-ground operator,” Mr. Zinn said of his partner, Andrew R. Klein of Westside Investment Partners. “He can figure out how something can go from one type of operator to another and know what these residential lots should trade for.”

Mr. Klein gave an example of a 700,000-square-foot-building they recently bought where the main tenant, who occupied 400,000 square feet, was leaving. That would be unappealing, if not disastrous, to many owners. But for Mr. Klein, “it’s about managing that risk,” he said.

Past Losses Don’t Mean Future Success

“The big false indicator is how much money the other people have already lost,” Mr. McNutt said. Buyers think it is an indicator of value, but it often is not. Distressed properties often require more investment.

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

“I’m betting that it’s a great buy,” Mr. Deifik said. “My operating expenses are substantially less than the group that opened it in 2012.”

LEAVE A REPLY

Please enter your comment!
Please enter your name here