Methods of Determining Reorganization Value in Chapter 11

The goal of a Chapter 11 bankruptcy is to allow a troubled business to stay in operation while it resolves its debts and to emerge in a solvent condition. A Chapter 11 reorganization plan must ensure that creditors will be repaid more on their debts than if the company had been closed and its assets liquidated. An accurate valuation of the company is an essential part of meeting this requirement.

Creditors in a Chapter 11 case need to know the company’s total value at the time the plan commences, also called its liquidation value. This is the amount that the company would net if all of its assets were sold off immediately. Potential future value is also important. The reorganization plan requires the cooperation of creditors, investors, suppliers, employees and others considering participating or doing business with the bankrupt enterprise, all of whom will want some indication that the reorganized company will likely be viable after the plan is completed.

There are a variety of methods used in business valuations. Many analysts use asset auction value, which is how much the business would net if all of its assets were sold off quickly at one or more auctions. This requires the services of experts knowledgeable about the current market for the types of assets involved. Liquidation most often brings significantly less in proceeds than when assets are marketed to get the best possible price.

Future valuations are necessarily more complicated, since they involve certain assumptions and some speculation. One often-used method of predictive valuation is future cash flow analysis, which measures a company’s viability in the short and medium term. Future cash flow is simply the amount of revenue an enterprise is expected to take in for goods and/or services minus the direct costs of providing those goods and services in a given time period. Cash flow ignores asset appreciation and other secondary sources of financial growth.

Another method used in future valuation is business sector outlook. Professionals who are familiar with certain business sectors conduct studies on where those sectors are headed. That data can be used to predict the fortunes of companies involved in those markets in the years ahead. For example, a future valuation of a construction material supply company would be adversely affected if a steep and prolonged housing recession is expected.

The valuation method that is most appropriate can often depend upon the nature of the business and its unique circumstances. In all cases, the objective should be to arrive at a thorough, detailed and feasible reorganization plan.

The Law Offices of Michael Jay Berger in Beverly Hills is one of the most preeminent bankruptcy law firms in Southern California. If you have a business bankruptcy matter, feel free to contact us online or call 310-271-6223 to schedule a consultation.