How to Merge a Company That is Going Bankrupt

by Randolf Saint-Leger

Determining whether a merger with a near-bankrupt company makes sense requires careful consideration. Merging a company headed toward bankruptcy adds another layer of risk to successful execution of a merger. How you integrate assets, liabilities and employees of the acquired firm is critical to the long-term viability of both companies.

Business Bankruptcy

A business whose liabilities exceed its assets is insolvent. Under such circumstances, the company has the option to file bankruptcy to protect itself from creditors. A Chapter 7 bankruptcy filing signifies that the company is no longer capable of meeting its financial obligations. The U.S. Bankruptcy Court assigns a trustee to oversee the liquidation of the company's assets to pay off creditors and other stakeholders such as employees. In contrast, a Chapter 11 bankruptcy reorganizes the company's debts through an agreement with its creditors. The company continues to operate until it is strong enough to emerge from bankruptcy protection.

Decide If It Makes Sense

A merger boils down to a strategic decision. In simple terms, a merger assumes the combination of two businesses is better than operating alone. Research suggests that most mergers fail to produce the expected synergies from combining two entities. If you intend to merge a near-bankrupt company into your organization, assess how the company arrived at its current state. Identify the circumstances surrounding the potential bankruptcy such as management failure, competitive pressure, or over-indebtedness and whether the company is a Chapter 7 or Chapter 11 bankruptcy.

Perform Due Diligence

Proper valuation of the assets and liabilities of the company is important should you decide to continue on course with a merger. You must obtain an accurate picture of the company's prospects. This part of the process involves establishing a series of meetings with the company's management, employees, accountants, lawyers, creditors and customers. Issues such as accounting policies and accuracy of financial statements are important. It is also important to take inventory of the company's assets and liabilities to determine which assets you intend to keep or shed and potential liabilities you may have to assume. This also requires that you meet with the company's creditors to understand the nature of the company’s debts. As the parent organization, you may have to assume some of the company’s liabilities.

Sort Out Legal Issues

Hammering out the details of a merger agreement requires that lawyers on both sides agree to terms such as severance packages of exiting employees, responsibility of both parties, and the assumption of asset and liabilities. Another consideration is operating structure and how to legally fold the other business into your company. Operating structure relates to whether a company is a corporation, limited liability company or partnership and how this affects the merger.


After the due diligence process and signing of a merger agreement, proceed to merge the company. Notify key constituents about the merger such as employees, customers and creditors. Follow the merger contract to the letter to avoid breaking any clauses in the agreement. If there is a trustee involved, you may have to follow protocol as established by the court.

Execution Risk

Execution risk is the risk that you fail to integrate the acquired company according to plan. Merging a near-bankrupt company increases execution risks. If the company was in dire straits before the merger, you must have a clear plan to turn around the company or utilize the acquired assets to bring greater value to your own company. There is the risk of losing customers and defection of key employees and suppliers. In addition, the cultures of the two entities may clash, further endangering the merger.

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