What Is A Stalking Horse Offer And How Does It Work?

What Is a Stalking Horse Offer and How Does It Work? (2024 Update)

If you’re a real estate investor or business owner exploring opportunities in bankruptcy sales, you’ve probably come across the term stalking horse offer. This legal and financial strategy plays a crucial role in helping debtors sell their assets while ensuring creditors receive fair value.

But what does it mean, how does it work, and why should you care? Let’s break it all down.

What Is a Stalking Horse Offer?

A stalking horse offer is the first bid made on a debtor’s assets during a bankruptcy proceeding, specifically in Chapter 11 cases. It establishes a starting price, or “floor bid,” for the assets up for auction. The goal is to avoid lowball offers and encourage competitive bidding. Here’s how it works:

• Transparency: A stalking horse bidder is a known entity and must be approved by the bankruptcy court.
• Due Diligence: The bidder often gets exclusive access to inspect the assets before making an offer.
• Court Approval: The offer sets the tone for the auction, ensuring creditors receive a fair minimum value.

The term “stalking horse” comes from hunting, where a horse would hide the hunter’s approach. In bankruptcy, the stalking horse bid “paves the way” for other potential bidders.

Why Stalking Horse Offers Matter in 2024

Stalking horse offers remain critical in today’s economic climate. With rising interest rates and increased bankruptcy filings, especially post-pandemic, businesses seek creative ways to maximize asset value. Whether you’re a real estate investor, a creditor, or a business owner, understanding stalking horse offers can help you:

1. Secure Valuable Assets: You gain a competitive advantage by being the first bidder.
2. Protect Your Investment: Break-up fees and other incentives safeguard your time and resources.
3. Navigate Complex Sales: In 2024, transparency and court oversight will make this process more predictable than private sales.

How Does a Stalking Horse Offer Work?

Let’s walk through the process step by step:

1. The Debtor Files for Chapter 11 Bankruptcy

When a business or individual files for Chapter 11, they must liquidate certain assets to pay off creditors. These assets could include real estate, equipment, intellectual property, or other valuable holdings.

2. The Stalking Horse Bidder Is Selected

The debtor works with their legal team to identify a qualified bidder willing to act as the stalking horse. This bidder agrees to:

• Conduct thorough due diligence on the assets.
• Submit an initial bid that reflects fair market value.

3. Terms Are Negotiated

Stalking horse bidders often negotiate favorable terms, such as:

• Break-Up Fees: Compensation if another bidder wins the auction.
• Expense Reimbursements: Repayment for legal and appraisal costs.
• Exclusive Rights: Priority access to asset information.

4. The Court Approves the Agreement

The bankruptcy court reviews and approves the stalking horse offer, ensuring it aligns with the interests of creditors.

5. The Auction Takes Place

Once the stalking horse bid is public, other potential buyers can submit competing offers. The auction’s goal is to achieve the highest price for the assets.

6. The Assets Are Sold

If no one outbids the stalking horse, the bidder acquires the assets at their initial offer price. If outbid, the stalking horse receives the agreed-upon protections, like break-up fees.

Pros of Being a Stalking Horse Bidder

Acting as a stalking horse bidder comes with unique advantages, including:

Exclusive Due Diligence

You get the chance to thoroughly inspect the assets before the auction. This means fewer surprises and a clearer understanding of what you’re buying.

Break-Up Fees

If another buyer successfully completes the purchase, you will receive compensation for your efforts. These charges usually vary from 1% to 3% of the overall purchase amount, presenting a beneficial opportunity for you.

Control Over Terms

As the first bidder, you can shape the initial deal. This may include:

• Selecting which assets are included in the sale.
• Defining the terms of the auction.
• Creating bidding rules that favor your strategy.

Competitive Advantage

Other bidders may be discouraged by your head start and opt for easier opportunities elsewhere.

Cons of Being a Stalking Horse Bidder

While there are benefits, stalking horse bidders also face risks:

1. High Upfront Costs: You’ll need to invest time and money in legal fees, appraisals, and due diligence—without a guarantee of success.
2. Risk of Overpayment: If no other bidders appear, you’re required to pay your initial offer price, even if the asset’s value is lower than expected.
3. Uncertain Outcome: There’s always a chance you’ll be outbid at the auction, leaving you with only the break-up fee.
4. Legal Challenges: Creditors or trustees can object to your bid, potentially voiding the agreement.

Real-World Example: Stalking Horse Offer in Action

Imagine a real estate investor, Rhonda, who identifies a commercial property owned by a business in Chapter 11 bankruptcy. She offers $2 million as a stalking horse bid, negotiating a 2% break-up fee and exclusive due diligence rights.

• Outcome 1: At auction, another bidder offers $2.5 million. Sarah walks away with $40,000 in break-up fees.
• Outcome 2: No one else bids and Sarah acquires the property for $2 million.

In both scenarios, Sarah’s strategic position as the stalking horse bidder helps her mitigate risk and capitalize on the opportunity.

Key Updates for 2024

Here’s what’s new in the world of stalking horse offers:

1. Digital Auctions: Many bankruptcy auctions are now held online, increasing transparency and accessibility.
2. Rising Break-Up Fees: Courts are approving higher fees to reflect inflation and increased due diligence costs.
3. Economic Trends: The current economic climate has led to more bankruptcy filings, creating more opportunities for stalking horse bidders.
4. Sustainability Assets: Green energy companies and renewable assets are becoming common targets in stalking horse deals.

Is a Stalking Horse Offer Right for You?

If you’re considering participating as a stalking horse bidder, ask yourself:

• Do I have the resources for due diligence and legal costs?
• Am I prepared to lose the bid and settle for break-up fees?
• Do I fully understand the asset’s value and risks?

It’s important to consult legal and financial experts to help you successfully manage this process. Their expertise can provide valuable insights and options tailored to your needs.

Is a Stalking Horse Offer Right for You?

If you’re considering participating as a stalking horse bidder, ask yourself:

• Do I have the resources for due diligence and legal costs?
• Am I prepared to lose the bid and settle for break-up fees?
• Do I fully understand the asset’s value and risks?

Seeking guidance from legal and financial professionals is essential for successfully navigating this process. Their expertise can provide valuable insights and support in making informed decisions.

Borrowers who need a five-star national mortgage company licensed in 48 states with no overlays and are experts in stalking horse offers, please call or text us at 800-900-8569 or email  alex@gustancho.com. We are available 7 days a week, even on holidays.

Frequently Asked Questions About Stalking Horse Offer:

Q: What is a Stalking Horse Offer?

A: A stalking horse offer is the first bid made on a debtor’s assets in a bankruptcy auction. It sets a minimum price, ensuring the assets don’t sell for too little.

Q: Why is it Called a Stalking Horse Offer?

A: The term comes from hunting, where a horse was used to hide the hunter\u2019s approach. In bankruptcy, the stalking horse “leads” the process, paving the way for other bids.

Q: How Does a Stalking Horse Offer Work?

A: A stalking horse bidder inspects the assets, makes an initial offer, and sets the tone for the auction. The offer is court-approved, and other buyers can then place competing bids.

Q: What are the Benefits of Being a Stalking Horse Bidder?

A: Stalking horse bidders get advantages like exclusive due diligence, break-up fees if outbid, and control over the auction’s terms.

Q: What are the Risks of a Stalking Horse Offer?

A: Risks include high upfront costs for legal and appraisal fees, potential overpayment if no one else bids, and the chance of being outbid.

Q: What Happens if no One Outbids the Stalking Horse Offer?

A: If no one bids higher, the stalking horse bidder wins the assets at their initial offer price.

Q: What are Break-Up Fees in a Stalking Horse Offer?

A: Break-up fees compensate the stalking horse bidder if another buyer wins the auction. They usually range from 1% to 3% of the purchase price.

Q: Can Anyone Make a stalking Horse Offer?

A: No, the stalking horse bidder is selected by the debtor and must be approved by the bankruptcy court to ensure fairness and transparency.

Q: Are Stalking Horse Offers Still Relevant in 2024?

A: Absolutely! With rising bankruptcy filings and the shift to online auctions, stalking horse offers remain a critical strategy for buyers and debtors alike.

Q: How do I Know if a Stalking Horse Offer is Right for Me?

A: Consider whether you have the resources for due diligence, are comfortable with the risks, and understand the asset’s value. Consulting legal and financial experts is highly recommended.

This blog about “What Is A Stalking Horse Offer And How Does It Work?” was updated on December 10th, 2024.