Bankruptcy and Valuation
Bankruptcy attorneys frequently address matters of valuation, both inside and outside the courtroom. In a bankruptcy or reorganization setting, properly determining the value of the assets of the debtor can be crucial for establishing a plan to exit the legal proceedings, or ensuring that the creditors receive the maximum value for their claims in the proceeding.
Bankruptcy matters that might require the involvement of valuation experts include:
- Debtor-in-possession sales and financing
- Seeking relief from an automatic stay
- When trying to determine the appropriate use of the assets of the debtor
- Determinations of insolvency and fraudulent conveyance
- Calculating economic damages
- Testing the reasonableness and feasibility of proposed reorganization plans
- Determination of reasonably equivalent value for transfers into or out of the bankruptcy estate
- In any litigation arising out of bankruptcy
Valuation Issues in Bankruptcy
The U.S. Bankruptcy Code does not require or define a specific standard of value for use in bankruptcy cases. Generally, the court, the attorneys involved in the matter, and the valuation firms that have been engaged will work to determine the best standard of valuation on a case-by-case basis. In recent years, the standard of value for cases in which the debtor is reorganizing has trended towards “fair market value,” while the “liquidation value” of assets has been applied in matters where the debtor is liquidating and dissolving.
The date of a valuation in bankruptcy can also be an issue. Sometimes a retrospective valuation date may be used, based on a financing or significant event in the debtor’s history, while other times a valuation of certain assets may be sought at or near the time that a party within the bankruptcy is seeking relief (as it pertains to those assets.)
When engaging in a valuation, the valuator will usually only consider information that was available and known on the date of the valuation. This information is subject to strict due diligence requirements, especially if/when it involves financial projections prepared by management. Due diligence will address when the financial information was prepared, the intended use of that information, and the qualifications of the preparer(s). Financial information prepared subsequent to the filing of bankruptcy is subject to challenge in court.
Bankruptcy valuations require significant professional judgement on the part of the valuators. Assumptions will be required regarding the financial condition of the company, its expected growth rate and debt/equity ration, as well as discount rates, current interest rates, and other drivers of business value.
Assumptions about the tax implications of the bankruptcy will also impact the valuation These assumptions include the expected use of net operating losses, the taxability of cancellation of debt income, the application of various exemptions, and the extent to which valuable tax attributes are retained or lost. The application of these rules will impact current taxes, as well as deferred tax assets and liabilities reported in financial statements under ASC 740 (formerly FAS 109.)
Valuation often plays a key role in bankruptcy. Achieving a fair, accurate, and supportable valuation can be difficult in cases of bankruptcy, but can assist both debtors and creditors with the legal process. It is good practice for attorneys and experienced valuators to work together closely and carefully consider the facts and circumstances of the case they are evaluating, to achieve the best results. The legal and valuation teams should coordinate to ensure that methodologies and due diligence are reasonable, defensible, consistent with legal precedent, and supported by files with an easy-to-follow paper trail.
Getting a fair, accurate, and supportable business valuation in any business scenario takes thoughtful planning and the kind of expertise that Turning Point can provide. Call us to discuss your situation today.