Target company recently underwent Article 9 restructure. Is this a red flag?

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July 30, 2025

by a searcher in Chicago, IL, USA

The company I’m evaluating went through an Article 9 restructuring last year. My understanding is that this means the lender seized the company’s assets after a default and sold them back to the same owner under a new legal entity. According to the broker, Article 9 allows the business to keep running free of old debts. For context, when calculating SDE, they add back $200K–$400K of interest expense (SDE is approx. $400K on $1M revenue), supposedly because the owner borrowed from high-interest lenders for personal expenses. Does an Article 9 restructuring always raise red flags? I would appreciate any feedback on extra diligence steps or hidden risks to watch out for after this kind of asset sale.
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Reply by a lender
from University of Wisconsin in Minneapolis, MN, USA
That is quite a bit of interest expense for a company of that size. You would have to see if they were taking on debt and then distributing the proceeds personally to fund his lifestyle. In my opinion I would avoid. Even perfectly clean acquisitions have enough transition hurdles without this kind of noise.
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Reply by a lender
from University of Missouri in Denver, CO, USA
Yes, definitely a red flag. Essentially a legal alternative to bankruptcy for liquidating or transferring assets usually synonymous with financial distress, creditor disputes, etc
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