From bankruptcy to portfolio: the PE playbook for restarts from bankruptcy

Private equity parties are increasingly looking to bankruptcies as a source of their deal flow. This can take the form of a strategic add-on to an existing portfolio company or as an independent investment to supplement the current portfolio. And often at more favourable acquisition prices. After all, a restart via an asset-liability transaction can create considerable value at a fraction of the regular acquisition price, and the assets are purchased without the historical debts of the bankrupt company. In addition, there are opportunities and scope to make the organisation leaner, and a transaction can be completed within weeks.

In recent years, we have seen this model frequently in practice. Think of the restart of Scotch & Soda in 2023, in which the American Bluestar Alliance took over the bankrupt fashion chain, or BCC, where investor Veling Groep restarted part of the shops from bankruptcy. In 2024, relaunches followed at Esprit (whose European branch went bankrupt), the Blokker stores after their high-profile bankruptcy at the end of 2023, and clothing chain Sacha, where a relaunch quickly reopened its doors after bankruptcy.

But not every relaunch is successful. Scotch & Soda, for example, went bankrupt again just one year after its relaunch. McGregor also had to close its doors again one year after its relaunch as a result of a second bankruptcy. Most recently, the Belgian fashion chain Paprika also withdrew from the Netherlands after a relaunch by a Luxembourg investment fund. Damage to their image, insufficient attention to compulsory creditors, an overly optimistic valuation of assets or an overly positive cash flow forecast proved fatal.

The lesson is clear: a restart offers real opportunities, but requires the same discipline as a regular takeover — under considerably greater time pressure. Below, we list the most important dos and don'ts for PE parties considering a restart.

Do's

1. Act quickly, but carefully. Administrators often set short bidding deadlines — sometimes only a few days. Express your interest early and ensure that your deal team is immediately operational. Loss of value due to departing clients and staff can quickly add up.
   
   
2. Pay close attention to the NDA. After signing a non-disclosure agreement, you will be given access to the accounts and/or a bid book and/or bid room. Two points to note:

• Who signs? Have the entity that actually intends to acquire the company sign — usually the subsidiary, not the fund itself. This will prevent discussions about binding commitments at the wrong level.
• What are the obligations? NDAs often contain non-solicitation provisions, such as a prohibition on approaching customers of the bankrupt company. If your subsidiary serves the same customer base, such a provision could affect the existing business operations of the subsidiary. Negotiate these provisions before signing and do not sign without careful consideration.

3. Identify separatists. Financiers with pledge or mortgage rights can control the sale process. They can exercise their rights as if there were no bankruptcy, thereby sidelining the receiver. Understand their position and take it into account when allocating the purchase price: intangible assets (trade names, customer files) are generally not pledged and belong to the estate, while tangible assets are often encumbered in favour of a separatist. The purchase price must be acceptable to both the receiver and the separatist.
   
   
4. Carry out targeted due diligence. Investigate ownership rights — suppliers may invoke retention of title on unpaid stocks — and carefully assess the value of intangible assets, work in progress and accounts receivable. Assets are sold 'as is, where is': the receiver generally does not provide any guarantees and the risk of ownership claims lies contractually with the purchaser.
   
   
5. Discount risks in the bid. Impairment of accounts receivable, claims from clients, employee rights and costs of compulsory creditors must be taken into account in advance in the bid. Take a realistic discount and avoid surprises afterwards. On the other hand, do not bid too low, as a restart or the assets are now usually awarded to the highest bidder.

Don'ts

1. Do not blindly sign an NDA. Standard confidentiality agreements from receivers can contain far-reaching restrictions. A non-solicitation clause that prohibits your company from approaching its own customers can lead to undesirable discussions — even if you ultimately decide not to proceed with the restart. See also the dos.
   
   
2. Do not underestimate compulsory creditors. Suppliers and service providers of the bankrupt company may ask the restarting party for guarantees before they resume deliveries: sureties, advance payments or even (partial) payment of old invoices. They do not always have a legal basis for this, but are often in a position to enforce it. Identify this in advance and factor the costs into your bid. For example, you do not want the entire IT system to fail after a restart before migration has taken place.
   
   
3. Do not ignore the position of former shareholders and directors. They can act as competing takeover candidates, have a considerable information advantage and often already have close contact with key persons and clients. In addition, shareholders can take the position of separatist through intercompany financing. Always ask the receiver whether former shareholders and directors are also interested in a restart.
   
   
4. Do not delay the bid. Every day counts. Clients look for alternatives, staff leave and the goodwill of the company evaporates. Speed in decision-making — combined with a substantiated bid — often makes the difference.

Finally

Experience with more recent retail bankruptcies illustrates that a restart is not a guaranteed success, even for professional investors. Without thorough preparation and a realistic business plan, there is a risk of renewed failure.

However, a restart also offers PE parties real opportunities to add value to their portfolio on attractive terms. But speed should not come at the expense of care. Would you like to discuss a specific case or have your bidding strategy reviewed? Feel free to contact our team.