Business Valuation and Bankruptcy

Preface ix

Chapter 1 Introduction 1

The Troubled Company Continuum 1

Operational and Financial Disstress 3

The Troubled Company Response 3

Valuation in Reorganization or Bankruptcy 5

Conclusion 6

Chapter 2 Industry Practitioners and Standards 7

Professional Organizations and Business Valuation Standards 7

Business Valuation Practitioners and Certifications 14

Conclusion 19

Notes 19

Chapter 3 The Basics of Business Valuation 21

The Purpose of the Valuation 21

Standard of Value 22

Premise of Value—Going Concern or Liquidation 23

Valuation Approaches 25

Fundamentals 29

Conclusion 38

Notes 38

Chapter 4 Income Approach 39

Discounted Cash Flow Method 41

Capitalized Cash Flow Method 57

Conclusion 58

Note 59

Chapter 5 Market Approach 61

Guideline Company Method 61

Comparable Transaction Method 73

Conclusion 81

Chapter 6 United States Bankruptcy Code 83

Introduction to the Structure of the Bankruptcy Code 83

Commencement of a Bankruptcy Case and Filing of Schedules 84

Chapter 7 of the Bankruptcy Code 85

Chapter 11 of the Bankruptcy Code 85

Avoiding Powers under the Bankruptcy Code—Preferences 94

Avoiding Powers under the Bankruptcy Code—Fraudulent Transfers 95

Valuation Principles from the Bankruptcy Courts 95

Conclusion 96

Notes 96

Chapter 7 Valuations in Bankruptcy as of the Date of the Hearing 97

Introduction 97

Relief from the Automatic Stay and Adequate Protection 98

§ 363 Sales 100

Use of Cash Collateral 105

Disclosure Statement 105

Plan Confirmation—Feasibility 105

Plan Confirmation—Best-Interests-of-Creditors Test 106

Plan Confirmation—Cram Down 106

Conclusion 111

Notes 111

Chapter 8 Valuations in Bankruptcy at a Time in the Past—Avoidance Actions 121

Overview 121

Avoidance Actions—Preferences 121

Avoidance Actions—Fraudulent Transfers 123

The Applicable Legal Tests for Insolvency 128

Insolvency Test: Valuation of Debts 129

Insolvency Test: The Valuation of Assets 132

Proof of Insolvency by Retrojection 135

The Insolvency Test: Comparing Assets and Debts 135

Is the Public Market’s Assessment in the Past Conclusive Proof of Solvency, Even If the Company Later Fails? 135

Use of Hindsight in the Valuation Process 136

Conclusion 143

Notes 143

Chapter 9 Solvency Opinions 149

Introduction 149

Who Uses Solvency Opinions? 149

Solvency Opinion Preparation 151

Solvency Metrics 153

Case Studies 155

Conclusion 157

Notes 157

Chapter 10 Daubert 159

Challenges to Experts or Their Testimony 159

Lack of Relevance 171

Practical Lessons from Daubert Cases for Experts and Lawyers 171

Conclusion 173

Notes 173

Appendix

AICPA Statement on Standards for Valuation Services No. 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset 179

Index 255