Last week, low-alc aperitif brand Haus announced that it would shut down after a funding round fell through, leaving the company without the necessary cash on hand to continue operating. But rather than filing for federal Chapter 7 or Chapter 11 bankruptcy protections, the California-based brand instead looked to a different type of common law bankruptcy procedure known as an Assignment for the Benefit of Creditors, or an “ABC.”
In brief, the process involves the transfer of all of an entity’s assets to a third party trust that is then responsible for selling those assets in an expedited process in order to pay back creditors.
While relatively common in the tech industry, ABCs are not as frequently discussed as other types of bankruptcy procedures and sometimes founders are unaware the process is even an option. That was the case with Haus co-founder and CEO Helena Price Hambrecht, who said she only learned about ABCs from a business mentor. That experience inspired her to speak out publicly so other entrepreneurs are aware it is an option should their companies someday face the worst.
An ABC may not always be the best choice for a troubled business, and depending on what state a company is based, might not even be available. However, it can also provide financial benefits and discretion, making it a favorable alternative to formal bankruptcy proceedings in the right circumstances.
How Does the ABC Process Work?
A company facing bankruptcy can engage in an ABC after receiving approval from both its board of directors and shareholders. At least in California, all assets of the business are then transferred to an assignment estate overseen by a neutral party whose job is to sell the business in an expedited M&A process, typically taking 30 to 45 days, with a goal of receiving the most cash possible in the deal. Proceeds from the acquisition will then be paid back to creditors, with fees and legal expenses being paid first, followed by secured creditors taking priority.
According to Bill Brinkman, a partner at San Francisco-area turnaround and restructuring services firm Jigsaw Advisors, companies and creditors generally begin the process knowing that the assets will be selling at a “distressed value” and that there is a chance they may not recuperate all owed funds.
In the event that a sale receives more than what is owed, leftover funds – after all fees are paid – would go into equity.
“In almost all cases, it comes down to a situation with a secured creditor where they’re comfortable with, a third party running a process that is likely the quickest way to to get whatever recovery back to the secured creditor that they can,” Brinkman said. “So once the secured creditor agrees to the ABC, then it’s ready, set, go and then the outcome is a product of whatever process is run.”
Where Can You Pursue an ABC?
ABCs are governed by state laws and they’re only an option in 35 states – with each jurisdiction having slightly different rules. According to Brinkman, California is perhaps the top location for the practice thanks to favorable laws that make ABCs a non-judicial process.
In particular, it gained popularity in the Golden State during the dot-com collapse in 2000, which took it “mainstream,” but has been used by companies in a wide array of industries including food and beverage; Brinkman noted that in recent years he’s advised wineries and craft breweries that have opted to pursue an ABC.
Many of the intricacies of ABCs discussed in this article are based mainly on California law and could vary depending on the state. Similar processes can be found in most states but they could have unique rules. Major U.S. business hubs like Delaware, Florida and New York all have ABC or similar options on the books.
Why Choose an ABC Over Federal Bankruptcy Protections?
One of the top reasons for choosing an ABC is also one of the reasons it is so rarely discussed in the media: privacy. Brinkman noted that, at least in California, ABCs are a non-judicial process, which allows companies to avoid potential objections raised by concerned parties in court and eliminates the need to file publicly available documents related to the bankruptcy.
“In the venture world, sponsors of all types typically prefer that, because the last thing that a financial sponsor wants is for it to be all over the newspapers or online that their portfolio company X has closed its doors and is selling its assets,” he said.
Which makes Hambrecht’s decision to go public about Haus pursuing the process unusual. Brinkman, who is not involved in Haus’s ABC, suggested that Hambrecht may be trying to maximize awareness for the sale of the assets, given the brand’s popularity and previously high valuation.
In the case of Haus, Hambrecht told BevNET last week that she believed an ABC was favorable as it gave the brand an opportunity to live on under new ownership. While Chapter 11 allows companies to liquidate individual assets separately, by keeping them as a single package she hopes an interested buyer will choose to revive the brand – albeit what the acquirer does with the assets following the transaction is out of a founder’s control.
ABCs are also usually much cheaper and quicker than federal bankruptcy proceedings, Brinkman added. An article from California law firm Stimmel, Stimmel & Roeser noted that Chapter 11 reorganization can cost “hundreds of thousands of dollars and even a business Chapter 7 Liquidation bankruptcy can easily cost tens of thousands or more.” ABCs, meanwhile, is paid for through a percentage of the assets sold.
What Are the Drawbacks?
Companies exploring an ABC must be prepared to give up control of the process itself, as well as many of the other protections and benefits included in federal bankruptcy law.
In California, unsecured creditors have no say in the process as under the law the process is designed to benefit them. Brinkman noted that if the sale doesn’t recuperate enough funds to repay those creditors, that could open up companies to being pursued by collection agencies – although the prospect of repayment is low.
ABCs are also preferable for companies with more owned assets or strong brand equity, making them more favorable targets for acquisition. Brinkman said the process is less likely to be deployed by, for example, a retailer that holds numerous commercial leases that would be protected under Chapter 11, but leave the company wholly liable to a breakup through an ABC. Other types of executory contracts or certain employment agreements would also provide issues for a company that would make federal bankruptcy a better option.
Potential buyers could also be turned off by the lack of protections, Brinkman added. Although he said it’s become less common over time, acquirers may demand a “pure cleansing of assets” and Chapter 11 also affords extra protections to them against successor liability claims.
But, in the face of corporate collapse, Brinkman said that founders and companies should weigh their options and, if their state allows it, an ABC could be worth considering as one possible way to close the book.
“I think the punchline is that the ABC process is much quicker, it’s much less regulated, and it’s much more flexible for companies that are going through a distressed situation to be able to sell their assets either as a going concern sale or just as a pure wind down liquidation,” Brinkman said.