The Importance of Business Valuation in Chapter 11
Business valuation is a fundamental aspect of a business filing for Chapter 11 bankruptcy. One element of a Chapter 11 plan is a liquidation analysis, which shows what creditors would receive if the case were converted to a Chapter 7. The debtor must calculate the value of its property, including any collateral pledged for its outstanding debts.
A business valuation is a comprehensive analysis of the company’s assets, liabilities, income and future earning potential. It provides a baseline for stakeholders to make informed decisions as to the following:
- Reorganization plan — By knowing the company’s true value, the court, creditors and stakeholders can determine if the proposed plan is feasible and whether the company can repay debt and emerge from bankruptcy as a viable entity.
- Asset sales — An accurate valuation helps ensure that the company receives fair market value if parts of the business or specific assets are sold to satisfy creditors. Otherwise, the company risks underselling key assets, leaving creditors with less than they are owed.
- Creditor recoveries — A company’s value directly affects what creditors can expect to recover. Secured creditors have priority based on the value of the collateral backing their claims, while unsecured creditors rely on the overall value of the company to estimate their potential recovery. If the valuation shows the company is worth less than anticipated, creditors may have to settle for reduced payments or longer repayment periods.
Business valuations in Chapter 11 cases typically use of the following methods:
- Income approach — The evaluator may use discounted cash flow (DCF) analysis to project future cash flows and determine their present value. This approach works well for companies with stable, predictable earnings.
- Market approach — The company’s revenues and assets are compared to similar businesses in the same industry that have been recently sold. This method is suitable when a company operates in a competitive market where comparative data is available.
- Asset-based approach — The company is valued based on the sum of its assets minus its liabilities. In cases where a business has valuable real estate, machinery or intellectual property, the asset-based approach may provide the most accurate estimate of its worth.
While small or mid-sized companies might be inclined to do business valuations themselves, the task is best left to independent financial experts, such as certified business appraisers, financial analysts or accounting firms. An independent report offers authority and credibility that might avert creditor challenges. Creditors may question a valuation they believe it undervalues the company or assets. In such cases, the court may appoint an independent party to conduct an additional valuation. An experienced Chapter 11 attorney can ensure that your business valuation is conducted in a manner most suited to your situation.
If you are contemplating or pursuing a Chapter 11 in California, you can trust the Law Offices of Michael Jay Berger in Beverly Hills to provide capable legal counsel in conducting a business valuation and attending to all aspects of the case. Call us at 310-271-6223 or contact us online to schedule a consultation.
