The bar isn’t set particularly high when it comes to the motorcycle media’s coverage of complex business issues, nor would you really expect it to be. The majority of my colleagues are more likely to have amateur or racing licenses, rather than MBAs or law degrees. Fortunately for A&R, I’m not an accomplished motorcycle racer.
It therefore didn’t surprise me last week that the headlines regard Erik Buell Racing ranged in their proclamations from the more accurate “ceased operations” to “gone bankrupt” – with the even more presumptive publications proclaiming the ultimate demise of the American brand.
This comes from a lack of understanding about how the receivership process works, which my European colleagues should have a stronger grasp of, as the concept is more prevalent across the pond.
As such, I would like to explain the issue further, and how it applies to the situation facing Erik Buell Racing. To entice you on what will surely be a boring subject to many, this doesn’t spell the end of Erik Buell Racing…not even close.
Receivership vs. Bankruptcy
Let’s start with the basics: receivership is not bankruptcy…well it kind of is…but not really…and yet…
From both a legal and financial definition, a company going into receivership is very different from a company that is declaring bankruptcy — the law treats them different, the process they go through is very different too, and the outcomes can at the end of the legal proceedings can offer different results.
It would be wrong to exchange the two words for each other — there is no Venn diagram overlap here.
But for the average citizen though, these abstract concepts seem very similar: a company has reached its financial endpoint, and as a result it is undergoing a process to try and make its creditors as whole as possible through a legal framework.
To borrow from Buell’s own use of racing metaphors, think of this problem a bit like World Superbike vs. MotoGP: an avid race fan can list the innumerable ways the two racing series are different (and never confuse the two with each other); but to a non-fan, they just see motorcycles racing around in circles.
So What is Bankruptcy?
In the United States, bankruptcy is a legal protection created at the federal level of government. There are quite a few “Chapters” to invoke in order to have bankruptcy protection, though most people are familiar with Chapter 11, and to a lesser extent Chapter 7, though the latter is the most common.
Chapter 11 bankruptcy is one way for a company (or person) to reorganize their debt. In the case of a business, this usually means creating a new business entity, transferring all the assets of the old company to the new company, leaving only the debt in the old company structure.
This process is done with court approval, and usually involves input from a company’s creditors. The idea is to make the company, in its new form, profitable again, so it can begin repaying its debtors.
Sometimes more favorable terms or lower payment amounts are agreed to, as the creditors would rather get some, rather than none, of their money paid back.
In a Chapter 7 situation though, there is no restructuring of the company. The assets of the company are liquidated in order to make the creditors as whole as possible.
The easiest analogy to make in this situation would be a home foreclosure, in which case a debtor loses their home because of a lack of payment, and a bank is allowed to seize the property, sell it, and use the proceeds against the outstanding mortgage.
Typically in Chapter 7 situations the business is no longer workable as a prosperous entity, no matter the situation, but it has tangible assets with a good market value within its possession.
Chapter 7 differs considerably on the personal level, which is an entirely different can of worms. I’m really just glossing through these immensely complex laws, just as an FYI. Consult a real lawyer before going belly up, not some motorcycle blog on the internet. Caveat Emptor. OMGWTFBBQ.
So Then, What is Receivership?
In a way, receivership is like a mix of Chapter 7 and Chapter 11 bankruptcy claims (bankruptcy lawyers, feel free to cringe here). The basic idea is that a court-appointed third-party will takeover the distressed company, and begin looking for buyers of the company’s assets, similar to Chapter 7.
Those assets can be tangible things, like machinery, inventory, or product, but they can also be intangible assets like intellectual property.
Usually a receiver begins by looking for a buyer (it’s technically an auction, but not in the bull rodeo sort of way) for the biggest groupings of assets first, which is almost always the company itself, as a whole.
Kind of like what’s done in an M&A investment, the distressed company (and its debt) will be shopped around for potential acquisition. If that fails, tangible assets might be lumped together, like say a factory, for instance. IP will be sold, and ultimately even the name of the company can be acquired.
The proceeds of the auction go first to the company’s creditors (all of whom have their own pecking order), and in the rare case of any money being leftover after the creditors are paid, the remainder is distributed to the business owners.
In some ways this is like Chapter 11, because from the distressed company, new companies can be created around the different part(s) of the company’s working/profitable assets.
Wisconsin is one of several states to offer receivership as a remedy at the state level of government.
For geek points, it is incorrect to call this body of law in Wisconsin Chapter 128 protection, but colloquially the phrase works as it mirrors with the federal nomenclature.
Get to the Point, Nerd…What Does This Mean for Erik Buell Racing?
As has been pointed out in our own article, and in others, Erik Buell Racing will go into receivership, with a lawyer acting as the company’s receiver.
Receivers are given sweeping powers in their role: they can run the business as they see fit, they can hire and fire at will, and they can manage the company’s assets — all in the name of maximizing asset/company value.
The simplest outcome to this proceeding would be for a large corporate buyer to come in, purchase EBR for its $20 million or so in debt, and continue with where Erik Buell left off.
In this situation, just about nothing would change with EBR, though it is likely that any purchaser would renegotiate the outstanding debt to a smaller value.
The catch here though is usually these sort of business opportunities present themselves ahead of a receivership process. For instance, there is some talk of Hero MotoCorp now acquiring 100% of EBR through the receivership process.
While that’s certainly possible, Hero surely would have had greater benefit in doing so ahead of EBR hitting financial rock-bottom, as the damage done by the cessation of operations surely outweighs whatever favorable terms the company hopes to gain by a receiver being in charge of the company, rather than Erik Buell.
A new owner could come to light — I have heard Polaris’s name casually lobed out there, mostly through wishful thinking — and this avenue is the more likely possibility, when compared to the above.
Hero being a near-majority partner would have likely scared away any potential investors that compete with the Indian brand back when EBR was solvent, that might change now though.
Of course, the issue of Hero having a 49.2% share in EBR is a factor as well, as any future investor would have diluted Erik Buell’s controlling stake in EBR – a factor which lead to Buell’s original corporate demise.
Should a buyer not arise, the receiver will begin selling EBR assets. This means liquidating any bikes that remain, selling whatever real property the company owns, and beginning to look for buyers to Buell’s IP — for all the talk of how innovative Erik Buell is (a premise I reject, outright), this would be the ultimate quantification of that genius.
The IP is perhaps the hardest part of EBR to sell, as the list of potential buyers are limited in number, and as one astute observer once wrote, “[Buell] wasted all his energy developing alternative solutions to mundane technical problems that yielded no appreciable benefit in performance over traditional bike systems.”
How much is the ZTL braking system worth? The free market is about to decide.
The End Game
We are too early into the receivership process to see where EBR will land. For those trying to divine the future, I would suggest looking at one of the motorcycle industry’s more recent receivership processes: Moto Morini.
The Italian company waffled in receivership for over a year, with several buyers coming and going. The company operates again now though, much in the same way it operated before — this should bolster the spirits of Erik Buell Racing fans.
It is entirely possible that Erik Buell himself could have a role in EBR (something you can see between the lines of Buell’s recent statement), assuming the company continues — this should bolster the spirits of Erik Buell fans.
That being said though, it is just as possible that the carcass of EBR will be picked by endemic and non-endemic vultures, leaving behind nothing that resembles Erik Buell Racing.
There are a lot of paths this story can take over the next few months. Surely everyone involved is weighing the power of the Buell brand, the success of EBR’s dealerships in moving product, the results of EBR in the AMA and WSBK series, and of course what the cold hard financials say about the motorcycle business.
Anything can happen at this point; and as always, time will tell. Stay tuned.