The Scenario

You’re an investor kicking the tires on a company in bankruptcy. If you agree to be the “stalking horse” bidder, you’ll expend significant time and money vetting the opportunity (including attorneys’ fees, quality of earnings analysis, valuation and appraisal work, and site visits), only to possibly end up in a bidding war with others wanting a free ride on your due diligence.

To lure you in, the debtor offers you $250,000 in “Bid Protections” (total breakup fee and expense reimbursement) if you don’t win at auction. Not only that, you’ll get a credit toward your cash bid at the auction in the amount of the Bid Protections.  This makes sense, you think, because the economic value of a competing bid is deflated by the $250,000 in Bid Protections that must be paid to you if the competitor is ultimately successful.  So to compare the economic value of