Bankruptcy-related disputes may involve various methodologies for valuation in addition to intricate corporate accounting issues. To address all of these complexities efficiently requires a unique blend of financial and analytic know-how, and that is where the true value of expert testimony from third-party valuation professionals comes into play.
The use of experts, particularly valuation analysts, is standard operating procedure in corporate litigation, as courts are increasingly seeking an objective valuation opinion on which they can base their judgments and opinions. In terms of bankruptcy litigation, there are a number of questions that a third-party valuation expert may be called upon to clarify.
Determining the reorganization value of an entity, determining solvency for recovery actions, and assessing the value of collateral, are just a few case points that could involve assessments of a business’s or particular asset’s value during bankruptcy litigation.
First, how does one define value? All assets, tangible or intangible, have value. At its most basic definition, value is, “the amount of money, goods, etc. for which a thing can be exchanged or traded.” On the surface then, it would seem that in order to assess the value of any asset, the simplest way would be to just sell it. However, there may not be a market for every asset involved in a major corporate bankruptcy case. And, even if there were, according to Judge Hon. Christopher S. Sontchi, markets may not be capable of establishing the potential sale price of an asset “if the market is inefficient, disrupted or dysfunctional.”
Financial experts have established several more accurate valuation methodologies. Yet, even they admit that valuation is not an exact science, and that both objective and subjective factors may be used in the valuation process. It is also important to keep in mind that the value of an asset may change based on the premise of value and standard of value on which the valuation is based. A valuation reflects value at a particular point in time and the value of an asset may change as different facts and circumstances arise. In addition, it may be more appropriate to attribute a range of values to an asset rather than a point estimate.
Still, valuation professionals use specific tools and guidelines. Basically a firm’s assets and/or its equity is “valued” in one of four ways:
- Asset-based valuation where one estimates the value of a firm by determining the current value of its assets.
- Discounted cash flow (DCF) valuation where one discounts cash flows to arrive at a value of the firm or its equity.
- Relative valuation approaches, which base value on how comparable assets are priced.
- Option pricing that uses contingent claim valuation.
Uses of Valuation in Distress and Bankruptcy
Regardless of which of the four methods is used, the purpose in bankruptcy litigation is the same: to determine as accurately as possible what the sale price would be, which is referred to as “price discovery.” Beyond that you can expect valuation experts to provide their opinions on the fairness of transactions, on equivalent value, and on the reasonableness of reorganization plans. Other uses may include:
- Assessing the viability of the debtor’s operations and the prospects for reorganization;
- Advising clients on values of business units or other assets to be sold in order to generate liquidity or rationalize the business;
- Advising creditors on the potential value of the distressed assets and options for receiving the highest future payout;
- Evaluating asset sale prices and offers; and
- Estimating collateral values in workouts and refinancings.
For the past decade or more, the courts have increasingly turned to professional valuation analysts during bankruptcy proceedings. In turn, the industry has seen increased professionalism and sophistication among valuation analysts who practice in the bankruptcy discipline.
That trend has created some high expectations of expert testimony from valuation professionals. Judge Sontchi points out that bankruptcy judges have become familiar and comfortable with DCF and the relative valuation approaches, and that courts have come to consider them as the “standard” methodologies. While use of accepted alternative valuation methods may be appropriate, judges may be inherently suspicious of methods that depart from the “standard.”
The complexities involved mean that litigators in need of the services of expert valuation analysis in bankruptcy proceedings should take great care to use an expert with a proven track record, who knows how to successfully employ the generally accepted methodologies, and who is cognizant of the source and reliability of data used to assess value, because reliance upon unreasonable data can void an expert’s opinion.
By TONY ARGIZ, CPA/ABV/CFF, ASA, CVA, CFE and VIRESH DAYAL, CPA/ABV/CFF, CIRA, CFE, CVA
Morrison, Brown, Argiz & Farra, LLC
1450 Brickell Ave., Suite 1800
Miami, FL 33131
South Florida Legal Guide 2014 Edition