The statistics around business bankruptcies appear to be getting worse every year. Annual business bankruptcies soared by approximately 200% from 2005 to 2008. Business bankruptcies increased significantly in 2009 and 2010 compared to 2006 and 2007.
Businesses with long histories, like the 163-year-old Tribune Company, as well as more recently younger businesses like Blockbuster, which aims to reduce its debt from $900 million to $100 million, and Circuit City, which recently seems to be finding a second life online, have all filed for bankruptcy. But regardless of the company's size or reputation, value is crucial to the bankruptcy process, and concerns with valuation will unavoidably come up.
These problems are present throughout the whole bankruptcy process and have an effect on all parties involved. The valuation services analyst may assist debtors, creditors, and legal counsel as either a consulting expert or a testifying expert, however, it is the role of the attorney to draw legal conclusions as part of the valuation, fairness, or solvency analyses. The information and presumptions utilized in the calculations have an impact regardless of whether a valuation expert employs one or all three of the recognized approaches, including the income approach, the sales or company comparison approach, and the cost approach.
When continuing business operations cannot be supported by the income the company is currently making, a company frequently chooses to file for bankruptcy under Chapter 7 of the Code. If a business decides to file for Chapter 7 bankruptcy, a trustee is appointed, the debtor stops operating, and all assets are liquidated in a systematic manner. Then, in accordance with their priority, the funds are allocated to the claimants and creditors.
Valuation disputes can involve assets or collateral, as well as disagreements about a company's true market value as a whole. They can also involve fairness concerns with the valuation of securities and cash flow streams being suggested to resolve the claims of various stakeholders. What are some of the most typical bankruptcy value issues? Several come to mind, including:
* In order to maintain a competitive edge, distressed companies frequently put off crucial investments that force reformed companies to catch up. The timing and size of an uptick must be carefully considered by lawyers and valuation specialists if a recent slump was brought on by a low point in a "cyclical" business.
Restructuring professional fees can have a substantial impact on a company's cash flows. When there is operational restructuring, severance and costs of closing a business' locations need to be carefully examined. Working capital deficits are typical when accounts payable days lengthen.
Counsel and the valuation analyst should be conversant with the complexities of market transaction method valuation when they are working together. For instance, extreme caution should be taken when relying on such market data if "inflated acquisition multiples" have contributed to the financial hardship of a sector.
Additionally, it is crucial for the analyst to take into account that the stock values of distressed companies might not be meaningful when calculating the numerator of multiples, to adjust debt to market value when doing so, and to use "debt-free" market multiples to lessen the impact that various capital structures can have on valuation.
A business's collateral's current worth as well as how much it has recently decreased in value or how much it is projected to decrease in value in the future must be determined by the expert. A going concern assumption of value is often assumed when addressing the valuation concerns in this regard unless the subject company is not anticipated to undergo reorganization. All conventional valuation techniques should be taken into consideration, depending on the specifics and circumstances of each situation.
It is critical for valuation experts to be able to competently assist attorneys—especially those with a broad range of legal expertise—in resolving difficult valuation issues and successfully meeting clients' objectives in the bankruptcy process in a downturn where even venerable, financially sound businesses can approach insolvency.
