Many people are surprised to learn the distinct and essential connection between a financially distressed business and a valuation expert. Filing for Chapter 11, otherwise known as reorganization bankruptcy, gives an insolvent company the opportunity to restructure while repaying creditors through a court-approved strategy for reorganization. With the ultimate goal of survival at the forefront, Chapter 11 filings allow for a failing company to demonstrate that the value of their business is far greater than that of the liquidation value of the business. Proving this requires proper and accurate bankruptcy valuations and appraisals.
Business bankruptcies often mirror the general state of the economy. Over the last two decades, Chapter 11 filings in the United States have seen some impactful high points and low points. The Great Recession in 2009, for instance, caused the rate of business bankruptcies to increase dramatically. As the economy continues to recover, however, bankruptcy filings have steadily declined since that time period. Valuation and the implications behind it play a highly significant role when it comes to filing a petition under Chapter 11. In this scenario, every component involved in the bankruptcy filing makes critical decisions based on the debtor, its assets, and the value of both.
Since valuation plays such a dominant role in the entire bankruptcy process, a valuation expert is critical in making sure that the company filing is fulfilling all technical requirements of bankruptcy code while simultaneously offering financial advice for the organization. Valuation specialists would be tasked with laying the foundation for the reorganization of the business under the Chapter 11 proceedings. More specifically, the restructuring plan in relation to valuation must:
- Establish that the economic consequences for the complying stakeholders are greater under Chapter 11 proceedings compared to Chapter 7 proceedings (business liquidation).
- Prove that following the bankruptcy court’s confirmation, the restructuring plan will not be expected to result in liquidation.
The above underlines the fact that an experienced, professional valuation expert is the true cornerstone of the bankruptcy process. The goal here is to maintain the utmost confidence of the trustee or creditors’ committee while valuing both the tangible and intangible assets of the company. Tangible assets, like buildings, land, equipment, etc., are valued with intangible assets like patents, trade names, etc. During this process, a valuation specialist will likely serve as a financial advisor as well. Some of the goals in this regard include:
- Measure the value of the reorganization of the business, thus gaining the confirmation from the bankruptcy court.
- Ascertain the value of the business under Chapter 7 liquidation.
- Determine the sustainability of the developing business’s proposed capital structure – this includes cash-flows and debt amounts.
- Determine adequate protection (safeguarding the creditor’s lien) or determine a solution if adequate protection does not exist.
The Chapter 11 restructuring process can be complex and overwhelming without the proper expertise in place to handle the proceedings. From negotiating with stakeholders to assessing alternative approaches, the managers of a financially distressed business must handle a wide-range of responsibilities, all while operating the business. As such, hiring a third-party valuation expert to prepare, facilitate, and navigate the reorganization process is crucial to its success. From preparing the valuation and financial analysis for bankruptcy court requirements to serving as an advisor throughout the negotiation process, utilizing the expertise of an experienced valuation analyst will ensure the most efficient and smooth restructuring process during a Chapter 11 filing.