363 Sale

When a company files for Chapter 11 bankruptcy, selling the business quickly and cleanly often represents the best path forward for all parties. The 363 sale mechanism, named after Section 363 of the U.S. Bankruptcy Code, enables this by allowing asset sales with court approval. Unlike traditional M&A transactions that might take six to twelve months, a 363 sale can close in 60 to 90 days from bankruptcy filing—critical when distressed companies are burning cash daily.

The process typically begins before the bankruptcy filing itself. The debtor and its advisors identify potential buyers and may negotiate a preliminary deal with a lead bidder called the stalking horse. This stalking horse bid sets a floor price that other bidders must beat, and in exchange, the stalking horse receives bid protections including a breakup fee (usually 2-4% of the purchase price) and expense reimbursement if outbid.

After the bankruptcy court approves bidding procedures, the debtor markets the assets to other potential buyers. If there's sufficient interest, an auction is held to generate competitive bidding and maximize the sale price. The court then holds a hearing to approve the final sale, and once approved, the buyer takes the assets free and clear—one of the most powerful aspects of this structure.

The 'free and clear' provision is what makes 363 sales particularly attractive to buyers. In a normal acquisition, buyers inherit the target's liabilities including environmental claims, product liability, employment disputes, and tax obligations. A 363 sale court order explicitly extinguishes most prior claims against the assets, dramatically limiting successor liability and providing a cleaner balance sheet than any other transaction structure.