Valuation matters in liquidation
Unfortunately, many businesses have liquidated assets to generate cash flow, restructured or filed for bankruptcy during the COVID-19 pandemic. Valuation expertise is essential for business clients during the liquidation process and for clients that want to acquire a company in liquidation. An experienced expert can help evaluate a distressed company’s future and its current financial picture to maximize liquidation proceeds.
What’s liquidation value?
Valuation professionals typically calculate a company’s value as a going concern. However, 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.
The International Glossary of Business Valuation Terms lists the following two types of liquidation value:
1. Orderly liquidation. In this case, assets are sold piecemeal over a reasonable period to maximize proceeds.
2. Forced liquidation. This premise of value assumes assets will be sold as quickly as possible, possibly via auction.
Timing, bankruptcy laws and judicial mandates all help determine what’s appropriate for a particular case.
How is value measured?
An expert hired to value a troubled company typically starts with its balance sheet. The book values of liabilities generally are accurate, but assets may require adjustments to estimate recoverability and current market values. The expert also considers the existence of unrecorded items, such as:
- Customer lists,
- IRS claims,
- Warranties, and
- Pending lawsuits.
If a company decides to liquidate, the valuation professional 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.
How can valuators help?
Liquidation value often serves as a “floor” for business value. It also can help owners decide whether to file for Chapter 7 (liquidation) or Chapter 11 (reorganization) under the Federal Bankruptcy Code. And it helps stakeholders evaluate the viability of spin-offs and mergers, out-of-court loan workouts, management buyouts, and reorganization plans.
Liquidation analyses are just the tip of the iceberg. Valuation experts can advise distressed businesses on such issues as negotiating debt restructuring with creditors and coordinating bankruptcy filings. They also can provide fairness opinions for management buyouts and third-party acquisitions and help implement reorganization plans.
When creditors file fraudulent conveyance lawsuits, valuators 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. Valuation experts also might work with, or serve as, court-appointed receivers and turnaround consultants.
On the flipside, they can also help buyers of distressed businesses determine the 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 and economies of scale with its existing operations.
Valuation plays an essential role in the liquidation process. Yet not every valuation expert is qualified to work on these matters. Select a professional who’s experienced in distressed company engagements and familiar with bankruptcy laws.
In addition to financial expertise, your expert needs the strong presentation skills necessary for persuasive court testimony and negotiations with investors, creditors and other concerned parties. A valuator who is well versed in liquidation matters can help your client emerge from the process in the best possible financial position.