Chapter 11 is a form of bankruptcy protection that allows creditors to be partially paid back as an insolvent company regains its financial viability. However, there are a number of issues that must be considered in filing for restructuring under Chapter 11. Ascertaining the actual value of the business and its assets is a critical element of the process.

A Chapter 11 reorganization often involves streamlining the company by divesting unprofitable business segments, selling off certain assets and/or reducing executive compensation. Creating more liquidity can work to the benefit of creditors and to the company itself as long as the core business remains operational. Each of these transactions therefore must be weighed in terms of fairness to creditors, shareholders and equity owners.

Among the valuation issues that are addressed in Chapter 11 are:

• Financial condition of the company — An overall assessment must be made of the company’s likely ability to regain its financial strength and emerge successfully from Chapter 11. If the company’s liquidation value exceeds its value as a going concern, filing for Chapter 7 bankruptcy protection may be the more prudent course.
• Liquidation value — This figure measures what the company’s assets are worth if they are sold, in either a stock sale or bulk sale. It includes major assets like real estate, inventory, equipment, intellectual property and good will. Because the company is in financial distress and under pressure to sell, the value of these assets may be lower than their usual fair market value.
• Going-concern value — This is how much a business is expected to be worth if it continues to operate. The value includes not only major assets but also the company’s operational plants, management staff, skilled employees and licenses and permits. The going-concern value also takes into account the company’s ongoing debt, including executive compensation, and predicted cash flow from sales and other earnings if it continues to operate.
• Reorganization value — This generally measures the fair value of the company’s assets, before considering liabilities, and estimates how much a willing buyer would pay for the assets immediately after the restructuring. This value usually assumes a discounted cash flow.
• Fresh start reporting — When the company emerges from Chapter 11, it may report its assets, liabilities and equity as a new entity as long as certain conditions regarding reorganization value and stock ownership are satisfied. There are a number of accounting and tax advantages to using fresh start reporting.

Thorough, careful evaluations become particularly critical when there are disputes among shareholders or with creditors over the company’s financial state. An experienced bankruptcy lawyer will work closely with qualified evaluation experts to determine whether proposed asset sales or other transactions are reasonable and in the best interests of a successful completion of Chapter 11.

Anker Law Group has experience handling all aspects of Chapter 11 reorganization and tackling related business valuation issues. Call our Rapid City office at 605-519-5967 or contact us online to arrange for a consultation and analysis of your situation.