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A valuation project in the bankruptcy context may include some of the following specific purposes:

  • Debtor in possession ("DIP") asset sales;
  • DIP financing collateral determination;
  • Insolvency claims;
  • Fraudulent conveyance;
  • Creditor protection considerations;
  • Reasonableness of a proposed plan of reorganization; and
  • Implementing post - Chapter 11 bankruptcy fresh-start accounting.

During each valuation project it is not uncommon to encounter unique and customized circumstances. However, in the bankruptcy context, below is a list of some of the most common.

Very important to define "value". The U.S. Bankruptcy Code doesn't define "value" like the Internal Revenue Code. The Bankruptcy Code Section 506a(1) describes value as "determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest." Beyond this limited guidance it is highly recommended to look to judicial precedent to see what value the courts have accepted. Further, it is highly recommended to determine the standard of value that coincides with the views of your legal counsel.

Known or knowable, as of a specific date. Most bankruptcy valuations require a retrospective valuation date, consistent to the financial event (i.e., transaction, dividend, etc.). As such, it is important to not consider events that may have taken place between the valuation date and the current date that were unforeseen as of the valuation date.

Applicable valuation approaches. The market approach, fairly common in most valuations, may not be applicable in the bankruptcy context. Comparable data is often available for financially distressed companies. However, the guideline companies are very likely different than the subject company of the valuation.

Due diligence. Reasonableness is often questioned in bankruptcy related disputes. As such sufficient due-diligence procedures must be documented and supported. Access to company management or related third parties with intimate knowledge of the subject company may be very limited, making clarification questions unlikely, if not impossible, and support for each assumption related to the overall conclusion that much more important. Some of the major assumptions that require significant due-diligence include, but are not limited to financial projections, discount rates (specifically the debt interest rates) and fixed asset values.

Bankruptcy related valuations and other financial analyses are required for a magnitude of reasons, for a variety of interested parties. Proper processes and procedures are imperative.