by Mike Costello
posted October 3, 2008
 Mike Costello |
Hiring a valuation expert early in the bankruptcy process can help preserve asset values, improve the chances of a successful turnaround and maximize liquidation proceeds.
Liquidation vs. going concern
Residential builders and subcontractors are among those hardest hit by the current soft economy. But bankruptcies span many industries, such as airlines, automotive parts manufacturers and furniture retailers. Factors contributing to business failures include tighter lending standards, rising energy and commodity prices, and sluggish demand.
Whatever the industry, most appraisals focus on a business’s going-concern value. That is, what is the value of a business enterprise that’s expected to continue to operate into the future? For distressed businesses contemplating bankruptcy, liquidation value is another important benchmark.
The International Glossary of Business Valuation Terms lists two types of liquidation value. In an orderly liquidation, assets are sold piecemeal over a reasonable period of time to maximize proceeds. Alternatively, forced liquidation value assumes assets will be sold as quickly as possible, possibly via auction.
Timing, bankruptcy laws and judicial mandates help determine the appropriate premise of value. Business valuation consultants are familiar with both going-concern and liquidation premises, making them invaluable advisors throughout the bankruptcy process.
Liquidation analyses serve many purposes
Liquidation value often serves as a “floor” for business value. If liquidation value exceeds going-concern value, a subject company is probably worth more dead than alive.
A valuation also can help managers decide whether to file for Chapter 7 (reorganization) or Chapter 11 (liquidation). Further, it can help stakeholders evaluate the viability of purchase offers, management buyouts and reorganization plans.
Expert analysis starts with the company’s balance sheet. The book values of liabilities are generally accurate, but assets may require adjustment to estimate recoverability and current market values. Valuation professionals also consider the existence of unrecorded items, such as patents, trademarks, customer lists, IRS claims, warranties and pending lawsuits.
If a company decides to liquidate, the business appraiser must factor in liquidation expenses, such as lease obligations, severance pay and professional fees. Typically, money is set aside in an escrow account for these incidentals before the company distributes liquidation proceeds to creditors and investors.
Beyond liquidation
Liquidation analyses are just the tip of the iceberg. Valuation consultants can advise distressed businesses on other issues, such as:
Devising and implementing reorganization plans,
Projecting expected cash flows and estimating going-concern values for reorganization alternatives,
Negotiating debt restructuring with creditors,
Coordinating bankruptcy filings,
Defending against insolvency and fraudulent transfer claims, and
Valuation professionals also might work with, or serve as, court-appointed receivers and turnaround consultants. They are likely to work closely with a client’s attorneys if legal issues are involved.
Money well spent
It may seem counterintuitive to hire a valuation consultant when a company is struggling to pay its operating costs. But valuation advice is money well spent.
Local case study
In one local situation, we served as a court-appointed receiver in a case where the business was not operating profitably. We were in the process of conducting a liquidation of the business, but during that process, we located a buyer who purchased the remaining assets at a price that paid off all of the outstanding indebtedness.
(Mike Costello, CPA/ABV, CFE is a Certified Public Accountant, Certified Fraud Examiner, business appraiser and consultant with more than 20 years of training and experience in business valuations and appraisals, business acquisitions and divestitures, and forensic accounting.
He has written several articles for the Tennessee CPA and the AICPA’s Management Consultant newsletter.
He was the Managing Director and President of Costello, Strain & Company, PC, a CPA firm he established in May 1984. The firm was merged with Joseph Decosimo and Company, LLP, CPA’s in September 2003. Joseph Decosimo and Company, LLP was founded in 1972 and today is one of the top 100 CPA firms in the nation.)
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