A business is considered solvent when it is able to meet its long-term obligations. In determining same both the federal Bankruptcy Code and the Uniform Fraudulent Transfer Act look at the fair value of a debtor’s assets. Although this definition seems straightforward, both lawyers and accountants quickly learn the devil is in the details. Some companies may be legally solvent but nonetheless are unable to pay their debts because the fair value of their assets might include nonliquid assets. Independent analysis A company’s solvency may come into play in (a) fraudulent conveyances, (b) bankruptcy, and (c) due diligence actions. When questions arise about solvency, the parties often call on a business valuation expert to prepare a solvency opinion. A solvency opinion is an independent professional analysis that questions management’s assumptions and projections. Obtaining an accurate, authoritative solvency opinion is essential because transactions made during an insolvency period can be voided by a court. Experts consider several key issues to determine solvency: Does the company have positive equity (that is, do assets exceed liabilities)? Is the company able to pay off debts as they come due? Does the company possess adequate capital to operate? With these questions in mind, the expert then applies three tests to analyze solvency. Test #1 – Balance Sheet Test The first test determines whether, at the time of the transaction at issue, the debtor’s asset value exceeded its liability value. Assets are generally valued at fair market value, rather than at book value. The latter […]
Monthly Archives: April 2019
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Testing For Solvency & The Business Valuation Expert
Posted in Business Valuation, on Apr 2019, By: Mark S. Gottlieb