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When it comes to business bankruptcies, the numbers seem to loom larger with every year. From 2005 through 2008, annual business bankruptcies increased by over 200%. In the years 2009 and 2010, business bankruptcies were more than double for the years 2006 and 2007. We have seen bankruptcy filings from businesses with long histories such as the 163-year-old Tribune Company, or, more recently, younger companies as Blockbuster, whose goal is to cut its debts from $900 million to $100 million, and Circuit City, which seems to be finding a second life online of late. No matter what the size of the company or its reputation, however, valuation plays a key role in the bankruptcy process; and, inevitably, valuation issues will arise. These issues pervade throughout the entire bankruptcy process–and impact each of the stakeholders along the way. While it is the attorney’s job to reach legal conclusions as part of the valuation, fairness or solvency analyses, the valuation analyst may serve debtors, creditors and legal counsel as either a consulting expert or a testifying expert. Whether a valuation expert uses one or all three of the accepted methodologies—the income approach, the sales or company comparison approach, or the cost approach–they are influenced by data and assumptions used under the formulas. A company typically elects to file for bankruptcy under Chapter 7 of the Code when continued business operations cannot be supported by the income the company is generating. If a company does elect to file a Chapter 7 bankruptcy petition, […]

Attorneys know that a credible valuation analysis requires a substantial number of hours by an analyst with a high level of expertise. When reviewing an expert valuation report, it is critical to identify the most common errors that can cause a court to discredit or even disregard a report. The following checklist serves as a quick guide for attorneys to avoid the most obvious deficiencies: Is the standard of value followed?  Has the analyst carefully disclosed and defined the applicable standard of value?  Has the standard of value been followed consistently throughout? Are all three valuation methods considered?  These include the income, market, and asset approaches. Is the internal analysis consistent?  For example: Did the analyst match pricing multiples or capitalization rates to the wrong economic income measure? Are current intangible asset operational data matched to different time periods, without appropriate adjustment? Did the analyst “normalize” financial statements without also normalizing the corresponding data for selected comparable companies? Was a “highest and best use” analysis performed? Was an “actual use” analysis also performed? Did the analyst make extraordinary, subjective, or speculative assumptions? Is there sufficient support for selected variables?  Any analyst should document the data used, the procedures performed, and the valuation conclusions reached.  There should also be sufficient tracing from the data in the quantitative analysis to the intangible asset in the owner/operator financial statement. Do the numbers add up?  Mathematical errors are more common than anyone cares to admit; check all numerical calculations for accuracy, and make sure […]

As most forensic accountants and business valuators know, post-acquisition disputes between an acquirer and target company are on the rise. These conflicts can be disruptive, time-consuming and expensive. To help in successfully resolving a dispute, the post-acquisition advisor needs to be extremely well versed in accounting, business valuation, economics, finance and litigation. In times when bank failures and bankruptcies are not uncommon, resolving post-acquisition disputes can be a formidable challenge. The most common disputes involve post-closing adjustments for working capital or net assets, indemnity or fraud claims, and earnout disputes. In a dispute involving both working capital and indemnity claims, for example, working capital claims are typically measured on a dollar-for-dollar basis while indemnity claims can be measured dollar for dollar, over a finite period or into perpetuity. The measurement of damages into future periods is predicated on assessing whether the misstatement will affect future periods; the buyer’s expectations were based on future performance; the business was significantly devalued after the acquisition; and the misstatement would have been “material” to a “willing buyer.” Potential disputes in mergers and acquisition transactions can often be just as complex as the deals themselves. It is the acquirer that instigates a dispute on the grounds that it’s unable to complete the deal because of financial shortfalls, although there are exceptions. In a 2009 roundtable discussion published in Financier Worldwide, one participant commented: “The economic downturn has significantly increased the number of commercial disputes, and it has changed the nature of dispute resolution. Where once parties could […]