Posted by Jennifer M. Settles, Esq. | June 29, 2026
Distressed Asset Sales: Buying Opportunity or Liability Trap?
When a business is struggling, its assets often go up for sale at prices that look too good to pass up – including equipment, inventory, real estate, customer relationships, or an entire operating division available for a fraction of what they’d cost from a healthy seller. For a well-positioned buyer, a distressed sale can be a real opportunity. But the same financial distress that creates the bargain also creates risk, and buyers who don’t understand the difference can inherit problems worth far more than they saved.
Here’s how to think about distressed asset sales, including what makes them attractive, where the traps lie, and how to protect yourself.
Why Distressed Assets Are Attractive
The appeal is straightforward: price. A seller under financial pressure, or a court overseeing a wind-down, is motivated to convert assets to cash quickly. That urgency can mean discounts a buyer would never see in a normal negotiation. For a buyer with capital and a clear plan, acquiring assets, a product line, or an entire business below market value can be a fast path to growth. The opportunity is genuine, but capturing it cleanly depends on how the deal is structured.
Asset Purchase vs. Stock Purchase Matters Even More Here
In a distressed context, how you buy is as important as what you buy. Acquiring the assets of a troubled company, rather than its equity, generally lets a buyer take the valuable pieces while leaving most of the seller’s liabilities behind. Buying the entity itself, by contrast, means inheriting its obligations along with its assets. Structuring the transaction as an asset purchase is one of the primary ways buyers limit their exposure. However, as discussed below, an asset purchase structure is not a complete shield.
The Successor Liability Trap
The biggest surprise for many distressed-asset buyers is successor liability – namely, the principle that, in certain circumstances, a buyer can be held responsible for the seller’s debts and obligations even in an asset deal. Depending on the facts and the jurisdiction, this can arise where the transaction is essentially a continuation of the old business, where it amounts to a merger in substance, or where it appears designed to dodge creditors. Unpaid taxes, employee claims, environmental obligations, and product liability can all follow the assets to a new owner. Understanding when successor liability applies is essential before you commit.
Fraudulent Transfer Risk
When a seller is insolvent, creditors and bankruptcy trustees can challenge a sale that they believe was made for less than reasonably equivalent value or intended to put assets out of their reach. If a transfer is later unwound as fraudulent, a buyer can lose the very assets it paid for. This is why buying distressed assets at a steep discount carries a hidden risk: the better the bargain, the more scrutiny the deal may attract later. Paying a defensible price and documenting the process carefully are extremely important.
The Advantage of Buying Through Bankruptcy
Counterintuitively, buying assets through a formal bankruptcy process can be safer than buying from a distressed seller outside of court. A sale approved by a bankruptcy court can transfer assets “free and clear” of many liens and claims, giving the buyer a level of certainty that a private distressed sale often cannot. The tradeoff is a more structured, court-supervised process with its own timeline and procedural requirements. For higher-value or higher-risk acquisitions, that added protection is frequently worth it.
Due Diligence Is Non-Negotiable
Distressed sellers can be in disarray. Their records may be incomplete, and the pressure to close quickly works against careful review. That is exactly when due diligence matters most. Before closing, a buyer should investigate existing liens and security interests, outstanding taxes, pending litigation, the condition and ownership of the assets, and any contracts or licenses that may not transfer. Rushing diligence to grab a bargain is how buyers end up owning someone else’s problems.
Protecting Yourself in the Deal
Beyond structure and diligence, the purchase agreement itself is a key line of defense. Thoughtful provisions, such as a clear allocation of which liabilities transfer and which don’t, representations about title and undisclosed claims, lien searches and payoffs handled at closing, and where appropriate, court approval,work together to turn a risky opportunity into a sound one. None of these are boilerplate in a distressed deal; each should be tailored to the specific risks the transaction presents.
The Bottom Line
A distressed asset sale can be either a buying opportunity or a liability trap, and what determines which often comes down to structure, diligence, and documentation. The discount is real, but so are the risks of successor liability, fraudulent transfer challenges, and hidden obligations. With the right approach, a buyer can capture the upside while keeping the seller’s problems where they belong . . . with the seller.
If you’re considering acquiring distressed assets or an entire troubled business, getting the structure right before you commit is what separates a smart purchase from an expensive mistake. Schedule a free consultation to talk through the opportunity and the risks. Contact us as www.jsettleslaw.com or (602) 617-3938.
About the Author Jennifer M. Settles makes business owners’ lives easier. With 25+ years structuring M&A deals, commercial contracts, corporate governance, and complex real estate transactions, including over two decades as lead in-house transactions counsel for major corporations, she brings big-firm firepower to the founders, dealmakers, and growing companies who need it most. Clients describe her as knowledgeable, refreshingly direct, and relentlessly focused on their best interests. Jennifer offers white-glove, direct-access service and transparent, predictable fees. Learn more or schedule a consultation.
