The Importance of Business Valuations in Chapter 11 Bankruptcies
When a business seeks debt reorganization under Chapter 11, assessments must be made of the assets, debts, claims and general worth of the company. These valuations are difficult in normal times. The recession caused by the COVID-19 pandemic has added greater complexity. With the upheaval in financial markets, it is all the more critical to make accurate measures of the economic health of a company and its potential to emerge successfully from Chapter 11.
In a Chapter 11 bankruptcy, a business debtor is permitted to continue its operations while it formulates a proposed reorganization plan. As part of this plan, the debtor needs to do a liquidation analysis, showing what creditors would receive if the case was converted to Chapter 7. As part of this liquidation analysis, the debtor needs to place a value on all or part of the business’s property, including collateral for debts that are outstanding. In some small and medium size Chapter 11 cases, including Subchapter V Chapter 11 cases, this business valuation is often done by the debtor. In other small and medium size Chapter 11 cases, and in most large Chapter 11 cases, hiring an outside business valuation consultant can establish the worth of the company’s assets, its future earnings capability and its position in the marketplace relative to its competitors.
In some cases, planning for Chapter 11 includes determining the company’s ability to obtain a debtor-in-possession (DIP) loan that can help to finance its operations during the reorganization. During the COVID-19 economic crisis, some DIP loans have been harder to come by, while other loans, such as Payroll Protection Plan (PPP) loans, are newly available to debtors.
In reviewing the business’s operational condition, the debtor and/or its attorney may deem it desirable or necessary to sell off portions of the business that are no longer beneficial to the company or that hinder the company from focusing on more profitable areas. A business valuation expert can determine how much those operations are worth, how easily they can be sold and how long the sale might take. An expert also can assist in the sale by locating potential buyers and evaluating the reasonableness of any offers.
Lastly, a valuation of the business may be indispensable if creditors or minority shareholders contest the feasibility of the reorganization. In the recession caused by the pandemic, proposed Chapter 11 plans often undergo intense scrutiny during the confirmation process. Bankruptcy law requires that creditors will receive at least as much in Chapter 11 as they would in a Chapter 7 liquidation, so a thorough valuation must make that clear.
At the Law Offices of Michael Jay Berger, I am available to help your business through tough financial times. If you are considering filing a Chapter 11 and would like to discuss your company’s options for debt reorganization, contact me online to schedule a consultation or give me a call at 310-271-6223.