Business Valuation During A Bankruptcy
There are several reasons that could lead a business into bankruptcy. It could be due to insufficient capital, poor management, lack of long-term strategy in place, strong industry competition, or even due to unforeseen global pandemic such as COVID 19.
A bankruptcy happens when the total debts of the company outweigh the total assets they have, and they are unable to pay off the debts.
There are two kinds of bankruptcy:
(1) One where the entire operation of the company is fully shut down and liquidation of the asset is undertaken to pay off all their creditors in its debt settlement.
(2) The other is where the company’s operations can be reorganized, and the assets can be restructured, and the business can still commence its operations after repaying its debts and obligations.
Business Valuation Goals
While going through bankruptcy, the number one reason to compute the business valuation is to find out the exact amount that can be made available to the secured and unsecured creditors. After which, the next goal is to find out if there will be leftover amounts that will be left to the equity shareholders. Additionally in a scenario where it is found that the company can operate again, the goal is then to find out the amount that should be liquidated and converted into cash to fund the working capital.
The Flow of Cash in Hand
In the scenario where the restructuring of the company is possible, then its assets will be used to pay off the significant and immediate debts that allow the business to continue operations again. In the ideal situation where the business starts to generate positive cash flow after a steady period of operation, the recommended method of business valuation is a cash-flow based method that utilises data of earnings before interest earnings, depreciation and taxes.
The Value of Liquidation
The value of liquidation is the least amount that the firm will get when you liquidate its assets. This is often used in a bankruptcy process where it is determined that restructuring is by no means going to turn the failed business around.
When a firm is being liquidated the only thing that is usually considered is the total value of all the assets. Usually an appraisal based valuation such as the asset based valuation method will be used.
A third-party appraisal firm like us will be hired to analyse the entire list of items available on the balance sheet. We will then calculate the depreciation on the assets, assess their current condition and then perform a comparison with the current market.
Speak with a Qualified and Experienced Valuer.