The following information is bonus material from Top Producer. It corresponds with the article "Do Due Diligence” Greg Vincent in the January 2009 issue.
Mark Lakers of Agribusiness and Food Associates in Omaha, Neb., which funds mergers and acquisitions, expects the ethanol industry to consolidate from 150 producers to 25 to 50 in the next three to five years—or sooner. Forty producers could be in Chapter 11 by Jan. 31.
Here are a few things to know if your buyer is one of them.
With Chapter 7, operations cease and the assets are sold, with the cash distributed to the creditors; secured lenders such as banks are paid first. A case known as In re Childress provided that when a grain elevator files bankruptcy, all farmers take a share of stored grain equal to the debt owed to them before receiving cash.
Chapter 11 encourages a business to continue operations while its finances are straightened out and the business is reorganized, says Ashley Gulke, a California attorney and daughter of Market Strategy columnist Jerry Gulke.
"After a company files for bankruptcy, all of the creditors supposedly can be heard by the court before the reorganization plan is made,” Gulke explains. "Go to the court date and be prepared to explain the implications of a loss to your business and family. It is the judge's duty to provide for fair and equitable treatment of all parties—creditors and debtors alike. The judge is permitted to cancel any unfilled contracts, so it's important to make your case.”
You may feel awkward if you've always done business by word of mouth, but better safe than sorry: Ask buyers for a statement of solvency, says Ashley Gulke, an attorney in California. "Don't sell on credit to someone you are worried may become insolvent before paying you. And even if your second cousin's new husband runs the elevator, read contracts closely.”
If your buyer files bankruptcy, you may have some recourse under the Uniform Commercial Code, which governs contracts for the sale of goods in all states except Louisiana. Section 2-702 provides the following, reports Ashley Gulke, a lawyer in Santa Clara, Calif., and daughter of Market Strategy columnist Jerry Gulke:
- A seller may refuse to deliver when he discovers that the buyer is insolvent.
- If the seller discovers that the buyer received goods on credit while insolvent, he may reclaim the goods if he makes a written demand for the goods within 10 days of receipt.
- If the buyer misrepresented his ability to pay the seller in writing within three months before delivery, the 10-day limitation does not apply. But make your demand as soon as possible.
- Goods may not be reclaimed once sold to a third party purchaser as long as the purchaser did not know of the deal between the original buyer and seller.