Abstract: Even in a bull market, some businesses struggle to make ends meet. This article highlights how outside financial experts can help struggling owners make informed decisions about their company’s future and maximize liquidation proceeds. It also explains how experts can help potential buyers of financially distressed businesses determine the appropriate asking price and conduct acquisition due diligence.
Valuation matters when a company is liquidating
Even in a bull market, some businesses struggle to make ends meet. Eventually, owners may decide to close the doors and liquidate a distressed company’s assets. Outside financial experts can help owners make informed decisions about the distressed company’s future and maximize liquidation proceeds. Experts can also help potential buyers of financially distressed businesses determine the appropriate asking price and conduct acquisition due diligence. Here are the details on these types of engagements.
How to value a business in distress
One of the most important questions a financial expert can answer is: How much is the distressed company worth? Although business valuation experts typically calculate a company’s value as a going concern, certain financial trends — such as recurring net losses, declining sales and severely reduced liquidity — may suggest that the business would be more valuable if it were liquidated. Generally, liquidation value is relevant when the company’s historical and expected earnings don’t contribute incremental value beyond its net tangible asset value.
There are two types of liquidation value, according to the International Glossary of Business Valuation Terms:
- Orderly liquidation. In an orderly liquidation, assets are sold piecemeal over a reasonable period of time to maximize proceeds.
- Forced liquidation. Forced liquidation value assumes assets will be sold as quickly as possible, possibly in an auction.
Timing, bankruptcy laws and judicial mandates all help a valuation expert determine the appropriate premise of value. Liquidation value often serves as a “floor” for business value. It also can help owners decide whether to file for Federal Bankruptcy Code Chapter 7 (liquidation) or Chapter 11 (reorganization). In addition, it helps stakeholders evaluate the viability of spin-offs and mergers, out-of-court loan workouts, management buyouts, and reorganization plans.
Where to start
When estimating liquidation value, experts typically start with the balance sheet. The book values of liabilities generally are accurate, but assets may require adjustments to estimate recoverability and current market values. For example, a distressed company may expect to receive 50 cents on the dollar for inventory and 70 cents on the dollar for receivables reported on the balance sheet.
Experts also must consider the existence of unrecorded items, such as patents, trademarks, customer lists, claims for back taxes, warranties and pending lawsuits. If a company decides to liquidate, the expert must factor in liquidation expenses, such as lease obligations, severance pay and professional fees. Usually, money is set aside in an escrow account for these incidentals before the company distributes liquidation proceeds to creditors and investors.
Alternatively, valuation professionals can help buyers of distressed businesses determine their targets’ strategic value — or value based on the specific buyer’s investment requirements and expectations. For example, a buyer may be willing to pay more than liquidation value for a company that provides synergies, economies of scale or expanded market share.
How experts can help beyond valuation
Beyond valuation matters, financial experts can advise distressed businesses on such issues as negotiating debt restructuring with creditors and coordinating bankruptcy filings. They can provide fairness opinions for management buyouts and third-party acquisitions and help implement reorganization plans. Valuation experts also might work with, or serve as, court-appointed receivers and turnaround consultants.
When creditors file fraudulent conveyance lawsuits, valuation experts can help determine the facts by performing a solvency analysis. The expert’s subsequent solvency opinion determines whether the allegedly fraudulent transfer has left the company unable to service its debt obligations or continue normal business operations.
A distressed business often needs an expert who specializes in bankruptcy consulting. When evaluating a potential candidate, assess the expert’s financial expertise and knowledge of bankruptcy law, as well as his or her communication skills. Strong communication is essential when it’s time to negotiate with investors, creditors and other concerned parties.