Val of Businesses, Securities, and IA for Bankruptc ...Analysis of DIP inbound and outbound intellectual property license agreements (Section 363)property license agreements (Section

Valuation of BusinessesValuation of Businesses, Securities, and Intangible

Assets for BankruptcyAssets for Bankruptcy Purposes

Valuation of Businesses, Securities, and Intangible Assets for Bankruptcy Purposes© 2016 National Association of Certified Valuators and Analysts™ (NACVA®). All rights reserved.

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Consultants’ Training Institute© 2016 National Association of Certified Valuators and Analysts™ (NACVA®). All rights reserved.

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Robert F. Reilly, CPA

Robert Reilly has been a managing director of Willamette Management Associates for over 25 years.Willamette Management Associates provides business valuation, forensic analysis, and financial opinionservices for transaction, financing, taxation, bankruptcy, litigation, and planning purposes. Robert frequentlyprovides valuation, fairness, solvency, and other financial advisory opinions related to companies within abankruptcy context. Robert has testified in both federal and state courts on numerous occasions with regardbankruptcy context. Robert has testified in both federal and state courts on numerous occasions with regardto bankruptcy‐related valuations.

Robert holds a BA in economics and an MBA in finance, both from Columbia University. He is a certified publicaccountant, accredited in business valuation, and certified in financial forensics. He is also a charteredfi i l l t h t d l b l t t t tifi d t t t tifi dfinancial analyst, chartered global management accountant, certified management accountant, certifiedbusiness appraiser, and certified valuation analyst.

Robert has served as member of the AICPA forensic and valuation services executive committee (FVSEC),business valuation committee (BVC), and consulting services executive committee (CSEC). He is an inductee( ) g ( )into the AICPA business valuation hall of fame.

Robert is the co‐author of 12 books, including Guide to Intangible Asset Valuation (revised edition publishedby the AICPA in 2014) and Practical Guide to Bankruptcy Valuation (published by the American BankruptcyInstitute in 2013)Institute in 2013).

Robert can be reached at (773) 399‐4318 or at [email protected].


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Discussion Outline

Common reasons to conduct a bankruptcy valuation

Analytical issues that practitioners face in Analytical issues that practitioners face in performing bankruptcy valuations

Caveats for valuation analysts performing Caveats for valuation analysts performing bankruptcy valuations

Summary and conclusion


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Common Bankruptcy Valuation Services

1. Preference actions solvency analysis (Section 547)547)

2. Fraudulent transfers solvency analysis (Section 548)548)

3. Asset sale price and creditor adequate protection analysis (Section 363)analysis (Section 363)

4. Analysis of DIP inbound and outbound intellectual property license agreements (Section 363)property license agreements (Section 363)

5. Assessment of adequate protection (decrease in value) of a creditor’s interest (Section 361)


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) ( )


6. Analysis of whether the value of a secured dit ’ l i i f ll d (R l 3012 d

(cont.)

creditor’s claim is fully secured (Rules 3012 and 3018) and determination of a secured creditor’s status (Section 560)status (Section 560)

7. Confirmation of the reorganization plan (Section 1129) opinions1129) opinions

8. Cram down of the reorganization plan (Section 1129) opinions) p

9. Secured creditor relief from the automatic stay (Section 362) opinions


7


10. Estimating collateral value for DIP financing(cont.)

11. Opining on debtor corporation director duties and the zone of insolvencyA i th j ti f th d bt ’ i t ll t l12. Assessing the rejection of the debtor’s intellectual property licenses (Section 365) – for the debtor licensor and for the licenseeslicensor and for the licensees


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Bankruptcy Code Section 547

In a Chapter 11 matter, the trustee may seek to avoid any “preference payments” made by the debtor company:

Preference Claims and Debtor Solvency

payments made by the debtor company:Section 547 excerpt

(b) Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property -

1. to order for the benefit of a creditor;2. for or on account of an antecedent debt owed by the debtor before such y

transfer was made;3. made while the debtor was insolvent; . . .

(f) For the purposes of this section the debtor is presumed to have been(f) For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition.


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In a Chapter 11 matter, the trustee may seek to avoid “fraudulent transfers” from the debtor company:

Fraudulent Transfers and Debtor Solvency

transfers from the debtor company:Section 548 excerpt

(a)(1) ) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, ifor incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—

(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred indebted; ormade or such obligation was incurred, indebted; or(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and


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(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred indebted; or

Fraudulent Transfers and Debtor Solvency

transfer was made or such obligation was incurred, indebted; or(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;

(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;

(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured; or

(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.


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Bankruptcy Code Section 101 Definition of “Insolvent”

Unlike the Section 548 three-part test for fraudulent transfers, insolvency is a one-part test:

Section 101 excerptSection 101 excerpt

(32) The term “insolvent” means—

(A) with reference to an entity other than a partnership and a(A) with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation, exclusive of—

(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity's creditors; and

(ii) property that may be exempted from property of the estate under Section 522 of this title;


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(B) with reference to a partnership financial condition such that the sum of

Definition of “Insolvent” (cont.)(B) with reference to a partnership, financial condition such that the sum of such partnership's debts is greater than the aggregate of, at a fair valuation—

(i) ll f h t hi ' t l i f t f th ki d ifi d i(i) all of such partnership's property, exclusive of property of the kind specified in subparagraph (A)(i) of this paragraph; and(ii) the sum of the excess of the value of each general partner's nonpartnership property exclusive of property of the kind specified in subparagraph (A) of thisproperty, exclusive of property of the kind specified in subparagraph (A) of this paragraph, over such partner's nonpartnership debts; and

(C) with reference to a municipality, financial condition such that the municipality is—municipality is—

(i) generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute; or(ii) bl t it d bt th b d


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(ii) unable to pay its debts as they become due.


The trustee must ensure that any sales of DIP assets are fair to the bankruptcy

Asset Sales and Adequate Protection The trustee must ensure that any sales of DIP assets are fair to the bankruptcy

stakeholders:Section 363 excerpt

(b)(1) The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate(c)(1) If the business of the debtor is authorized to be operated under Section 721, 1108, 1203, 1204, or 1304 of this title and unless the court orders otherwise, the trustee may enter into transactions including the sale or lease of property of the estate in theenter into transactions, including the sale or lease of property of the estate, in the ordinary course of business, without notice or a hearing, and may use property of the estate in the ordinary course of business without notice or a hearing.

(p) In any hearing under this section–(1) the trustee has the burden of proof on the issue of adequate protection; and

(2) the entity asserting an interest in property has the burden of proof on the issue of the validity, priority, or extent of such interest.


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Bankruptcy Code Section 363DIP Entering into Inbound or Outbound Intellectual Property License Agreements

Section 363 covers the “use, sale, or lease of property” within a bankruptcy estate.

Therefore, Section 363 covers both inbound and outbound intellectual property licenses entered into by the DIP.


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Bankruptcy Code Section 363 (cont.)DIP Entering into Inbound or Outbound Intellectual Property License Agreements

The trustee (or the DIP) may wish to enter e us ee (o e ) ay s o e einto such agreements for operating purposes or cash flow generation purposes, but only if g p p , ysuch agreements are fair to the bankruptcy stakeholders.


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The trustee is responsible to ensure that the e us ee s espo s b e o e su e a eestate receives no less than a fair price for outbound licenses and pays no more than a p yfair price for inbound licenses—and does not decrease the security of the secured ycreditors.


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The valuation analyst may be asked to e a ua o a a ys ay be as ed oanalyze and opine (at a hearing) on the fairness of the proposed intellectual p pproperty license agreement.


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If an event (e g a Section 363 sale) causes a decrease in a creditor’s

Decrease in Value of Creditor’s Interest If an event (e.g., a Section 363 sale) causes a decrease in a creditor s

interest in debtor property, the creditor will receive cash or an additional lien on debtor property:Section 361 excerpt

When adequate protection is required under Section 362, 363, or 364 of this title of an interest of an entity in property, such adequate protection may be provided by—

(1) requiring the trustee to make a cash payment or periodic cash payments to such entity, to the extent that the stay under Section 362 of this title, use, y, y , ,sale, or lease under Section 363 of this title, or any grant of a lien under Section 364 of this title results in a decrease in the value of such entity’s interest in such property;


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p p y;

Bankruptcy Code Section 361 (cont.)

(2) idi t h tit dditi l l t li t th

Decrease in Value of Creditor’s Interest(2) providing to such entity an additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of such entity’s interest in such property; or

(3) granting such other relief, other than entitling such entity to compensation allowable under Section 503 (b)(1) of this title as an administrative expense as will result in the realization by such entity ofadministrative expense, as will result in the realization by such entity of the indubitable equivalent of such entity’s interest in such property.


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Valuation of Secured ClaimsValuation of Collateral and of a Secured Claim Over Time


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Bankruptcy Rules regarding a

The court may hold a valuation hearing when there Secured Creditor’s Interest

y gis a question about the value of a creditor’s security interest in the debtor company:Rule 3012 Valuation of Security excerptThe court may determine the value of a claim secured by a lien on property in which the estate has an interest on motion of any party in interest

d ft h i ti t th h ld f thand after a hearing on notice to the holder of the secured claim and any other entity as the court may direct


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may direct.

Bankruptcy Rules regarding a

The value of a secured creditor’s interest is important with regard Secured Creditor’s Interest (cont.)

p gto the approval (or rejection) of the proposed plan of reorganization:

Rule 3018 Acceptance or Rejection of Plan in a Chapter 9 (Municipality) or a Chapter 11 (Reorganization) Case excerpt

(a) Entities Entitled To Accept or Reject Plan; Time for Acceptance or(a) Entities Entitled To Accept or Reject Plan; Time for Acceptance or Rejection. A plan may be accepted or rejected in accordance with Section 1126 within the time fixed by the court pursuant to Rule 3017.

(d) Acceptance or Rejection by Partially Secured Creditor. A creditor whose claim has been allowed in part as a secured claim and in part as an unsecured claim shall be entitled to accept or reject a plan in both capacities.


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Secured creditors want to prove that the value of their security interest is fully secured i e greater than the debtor’s liability to them:

Determination of Secured Creditor Status

fully secured—i.e., greater than the debtor s liability to them:Section 560 excerpt

(a) (1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under Section 553 of this title, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to set off is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest.


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(b) T th t t th t ll d d l i i d b

Determination of Secured Creditor Status

(b) To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or state statute under which such claim aroseagreement or state statute under which such claim arose.


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V l ti l t ft k d t i th d l f

Reorganization Plan Confirmation Valuation analysts are often asked to opine on the proposed plan of

reorganization:

Section 1129 excerpt

(a) The court shall confirm a plan only if all of the following requirements are met: . . .

(7) With respect to each impaired class of claims or interests—(A) each holder of a claim or interest of such class—

(i) has accepted the plan; or(ii) will receive or retain under the plan on account of such claim or interest

property of a value as of the effective date of the plan that is not less than theproperty of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date; . . .


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(11) Confirmation of the plan is not likely to be followed by the liquidation or the

Reorganization Plan Confirmation(11) Confirmation of the plan is not likely to be followed by the liquidation, or the

need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan. . .

(16) All transfers of property of the plan shall be made in accordance with any(16) All transfers of property of the plan shall be made in accordance with any applicable provisions of nonbankruptcy law that govern the transfer of property by a corporation or trust that is not a moneyed, business, or commercial corporation or trust.

(b)(1) Notwithstanding Section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate

f i l d i f i d it bl ith t t h l f l i i t tunfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.


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(2) For the purpose of this subsection the condition that a plan be fair and equitable

Reorganization Plan Confirmation(2) For the purpose of this subsection, the condition that a plan be fair and equitable

with respect to a class includes the following requirements:(A) With respect to a class of secured claims, the plan provides—

(i)(I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and

(II) that each holder of a claim of such class receive on account of such claim d f d h t t t li l h ll d f h l i f ldeferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property;


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Issues in Assessing the Proposed Plan of Reorganization

In addition to opining on whether the plan is fair and equitable “the court wants to knowfair and equitable, the court wants to know the analyst’s opinion of whether the proposed plan of reorganization will ‘work’.”


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Issues in Assessing the Proposed

A th i ti l j ti i bl bl

Plan of Reorganization (cont.) Are the reorganization plan projection variables reasonable

and adequately supported?

Re en e gro th rates• Revenue growth rates

• Revenue sources

E ti• Expense ratios

• Profit margins

• Income tax expense

• Other income tax attributes


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D th d l j ti id

Plan of Reorganization (cont.) Do the proposed plan projections consider

sufficient future investments?• In working capital• In capital expenditures• In “investment” expenses (R&D, selling

expense) Does the proposed plan assume (or require)

any future sale of assets?Valuation of Businesses, Securities, and Intangible Assets for Bankruptcy Purposes© 2016 National Association of Certified Valuators and Analysts™ (NACVA®). All rights reserved.

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a y u u e sa e o asse s


D th d l ( i ) f t it l i f i ?

Plan of Reorganization (cont.) Does the proposed plan assume (or require) future capital infusions?

• New debt• New equityq y

Does the proposed plan provide a supportable debt repayment schedule?

Does the proposed plan provide a return on equity? Does the reorganized business achieve a positive NPV? How does the plan’s implicit IRR compare to the reorganized debtor’s How does the plan s implicit IRR compare to the reorganized debtor s

WACC?


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Valuation analysts are often asked to opine on whether the proposed

Cram Down of the Reorganization Plan Valuation analysts are often asked to opine on whether the proposed

reorganization plan is “fair and equitable”:

Section 1129 excerpt

Another requirement for reorganization plan confirmation is that, with respect to each class of claims, (1) such class has accepted the plan or (2) such class is not impaired under the plan If all theplan, or (2) such class is not impaired under the plan. If all the requirements for plan confirmation are met except for this one, the plan can still be confirmed if the plan does not discriminate unfairly, and is fair and equitable with respect to each class of claims or interests that is impaired under, and has not accepted the plan.

This is known as a cram down


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This is known as a cram down.

Bankruptcy Code Section 362 Secured

After the bankruptcy filing there is an “automatic stay” of the creditors’ ability to

Creditor Relief from Automatic Stay After the bankruptcy filing, there is an automatic stay of the creditors ability to

collect prepetition debts:

Section 362(d)(1) and (2) excerpts

On request of a party in interest and after notice and a hearing, the court shall grant relief from the [automatic] stay . . ., such as by terminating, annulling, modifying, or conditioning such stay—

(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;

(2) with respect to a stay of an act against property . . ., if—( ) t espect to a stay o a act aga st p ope ty ,

(A) the debtor does not have an equity in such property; and(B) such property is not necessary to an effective reorganization . . .


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DIP Financing

A debtor’s ability to borrow is limited in Chapter 11. Without t th i ti d bt l i dicourt authorization, a debtor company can only incur ordinary

course of business trade debt that will be allowed as an administrative expense in the bankruptcy caseadministrative expense in the bankruptcy case.

The court can authorize the obtaining of credit secured by a senior or equal lien on encumbered property of the estate only if (1) the debtor is unable to obtain credit otherwise and (2) there is adequate protection of the interest of the h ld f th li th t hi h h iholder of the lien on the property on which such senior or equal lien is proposed to be granted.

This debt is usually referred to as DIP financing


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This debt is usually referred to as DIP financing.

The Zone of Insolvency and Debtor

Di t f d bt ti d t f

Corporation Director Duties Directors of a debtor corporation owe a duty of

loyalty, care, and good faith to the corporation and to its shareholdersto its shareholders.

But when a corporation approaches the zone of insolvency under the laws of most states theinsolvency, under the laws of most states, the directors owe those duties to the creditors, too.

In such a case the creditors (and not just the In such a case, the creditors (and not just the shareholders) have standing to assert breach of fiduciary duty claims on the company’s behalf.


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Bankruptcy Code Section 365(n) – Rejection of D bt ’ I t ll t l P t Li

Section 365(n) allows the trustee to reject an executory contract in which the debtor is a licensor to a right to intellectual property

Debtor’s Intellectual Property Licenses

which the debtor is a licensor to a right to intellectual property.

If such a contract rejection is made, the licensee has certain rights specified in Section 365(n).

The analyst may assist the trustee in the decision of whether or not to reject the debtor’s outbound intellectual property licenses.

The analyst may assist the licensee(s) in the assessment of the licensee rights in the case of the trustee's rejection of this debtor intellectual property license.

Recall that, under Section 101 (35A), intellectual property is defined as patents, copyrights, and trade secrets—but not trademarks.


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Generally Accepted Business Valuation

Income approach

Approaches and Methods

• Discounted cash flow method• Direct capitalization method

Market approach Market approach• Guideline publicly traded company method• Guideline merged or acquired company method

B k l h d• Backsolve method Asset-based approach

• Asset accumulation method• Adjusted net asset value method• The BV asset-based approach is not the property cost approach• The NBV method is not an asset-based approach valuation method


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The NBV method is not an asset based approach valuation method

When is the Appropriate Valuation Date for the Subject Analysis?

Financially bl d

Zone of i l

Bankruptcy i i

Company Company i

Reorganized

time

troubled company

insolvency petition filed

operates within

bankruptcy protection

reorganizes company

The debtor company will have materially different

p

p y yresults of operations (and, therefore, a different value) before, during, and after the bankruptcy


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When is the Appropriate Valuation

The debtor company expected returns will be

Date for the Subject Analysis? (cont.) The debtor company expected returns will be

different at different stages of the bankruptcy analysisy• Contract-related expenses• Payments of debtor liabilitiesy• Impact on revenue• Impact on employees, customers, suppliersImpact on employees, customers, suppliers• Bankruptcy-related expenses• Income tax expense


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• Income tax expense

When is the Appropriate Valuation

The debtor company risk (financial and

Date for the Subject Analysis? (cont.) The debtor company risk (financial and

operational) will be differentDiff t t f it l t• Different costs of capital components

• Different availability of capital The debtor company capital structure will be

different• Different amounts of debt and equity• Different debt service obligations


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Different debt service obligations

Issues Analysts Face in the

1. There is no Bankruptcy Code definition (or standard) of the term “value”

Bankruptcy Valuation1. There is no Bankruptcy Code definition (or standard) of the term value

• Analysts sometimes use fair value, fair market value, market value, other standards of value

• The Bankruptcy Code does not define reasonably equivalent value• Section 506(a)(1) provides that “value shall be determined in light of the purposeSection 506(a)(1) provides that value shall be determined in light of the purpose

of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.”

• Also in Section 506(a)(2) provides that “If the debtor is an individual in a case underAlso in Section 506(a)(2) provides that If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing

• Section 548(d)(2)(A) states: “value” means property, or satisfaction or securing of a ( )( )( ) p p y, gpresent or antecedent debt of the debtor, but does not include an underperformed promise to furnish support to the debtor or to a relative of the debtor


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Issues Analysts Face in the Bankruptcy Valuation (cont.)

2. The analyst’s use of hindsight in the bankruptcy valuation is discouragedp y g• The courts seem to adopt the so-called

known or knowable rule• There is usually a controversy over when

actual events (favorable or unfavorable) would have been known or knowable


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Th l t’ li t d fi i l

Bankruptcy Valuation (cont.)3. The analyst’s reliance on management-prepared financial

projections is often questioned• How contemporaneous are the projections to the valuation date?• Were the projections prepared after the valuation date—but the

valuation variables were still known or knowable?• Were there various versions of the management projections?

What was the purpose for which the management projections were• What was the purpose for which the management projections were prepared?

• How skilled was management in preparing its projections?• How reliable is the selected set of management projections?• How reliable is the selected set of management projections?• Should the analyst use various sets of projection scenarios?


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Th l t’ l ti f l ti i bl i ft

Bankruptcy Valuation (cont.)4. The analyst’s selection of valuation variables is often

questioned• Should variables reflect the current state of the debtor?• Should variables reflect the reorganized state of the debtor?• Should variables reflect a willing buyer or the industry average

assumptions?How does the assumed condition of the debtor company affect• How does the assumed condition of the debtor company affect the kd, ke, debt/equity ratio, or WACC?

• How does the assumed condition of the debtor company affect the expected LT growth rate?the expected LT growth rate?

• Should the selected discount rate relate to the business risk of the debtor company or to the performance risk of the specific projections?


45

projections?

Issues Analysts Face in the Bankruptcy Valuation (cont.)

5. The current interest rates may be considered unreasonably low• Low risk-free rate affects the ke• Low corporate bond interest rates affect the

kdkd• Can the debtor company actually realize

such low capital costs?such low capital costs?• Does an understated WACC overstate the

debtor company value?Valuation of Businesses, Securities, and Intangible Assets for Bankruptcy Purposes© 2016 National Association of Certified Valuators and Analysts™ (NACVA®). All rights reserved.

46

debtor company value?


6. The reasonableness of the analyst’s due diligence is often Bankruptcy Valuation (cont.)

6 e easo ab e ess o t e a a yst s due d ge ce s o tequestioned• A contemporaneous valuation versus a retrospective

valuation?valuation?• Was there access to debtor company management

and other parties?• The parties’ memories and perceptions often change

over time• Limited debtor company documents may be availablep y y• Industry research may be subject to various

interpretations• “Hindsight is always 20/20”


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• Hindsight is always 20/20


C id ll f th i t ff t thBankruptcy Valuation (cont.)

7. Consider all of the income tax effects on the debtor company value• Debtor company effective income tax rate• Debtor company effective income tax rate• Debtor company income tax expense• Value of deferred income tax assets or liabilities• Use of NOLs and other debtor company income tax

attributes• Change of ownership may affect the debtor company tax g p y p y

attributes• Change of ownership may affect the debtor company

asset tax basis


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asset tax basis


Th l t’ f i d t l ti l f th b i

Bankruptcy Valuation (cont.)8. The analyst’s use of industry valuation rules of thumb is

often questioned• Rule of thumb financial pricing multiples• Rule of thumb operational pricing multiples• Rule of thumb values of intangible assets/contingent liabilities (e.g.,

capitalization of the debtor operating leases)Rules of thumb for individual financial projection variables• Rules of thumb for individual financial projection variables

• Rules of thumb assume the average company in the subject industry

• If valid rules of thumb should be supported by empirical data• If valid, rules of thumb should be supported by empirical data


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P f i th h fl t t ithi l l i

Bankruptcy Valuation (cont.)9. Performing the cash flow test within a solvency analysis

• Inclusion of any new debt or new equity capital during the cash flow projection periodConsideration of the debtor’s c rrent credit a ailabilit d ring• Consideration of the debtor’s current credit availability during projection period

• Consideration of any asset sales during the projection period• Consider the longest term debt outstanding in the projection• Consider the longest term debt outstanding in the projection

period• Consider any debt balloon payments that come due later in the

projection periodprojection period


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Th l t’ f th k t h i i ti

Bankruptcy Valuation (cont.)10. The analyst’s use of the market approach in an inactive

market is often questioned• There are no sufficiently comparable publicThere are no sufficiently comparable public

companies• There are no sufficiently comparable M&A

t titransactions• There is no current market for the sale of the debtor

company (assets or securities)company (assets or securities)• How reliable are “backsolve method” actual sale

transactions in the debtor company securities


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Analyst Caveats When Preparing Bankruptcy Valuations

1. Request and accept legal counsel advice and instructions• Document all legal instructions• Document all legal definitions• Don’t practice law without a license• Let legal counsel take responsibility for

legal issues


52

Analyst Caveats When Preparing Bankruptcy Valuations (cont.)

2. Legal counsel is not always fully forthcoming with the valuation analystg y• Be aware of any creeping commitments

regarding the scope of the engagement• Be aware of any limitations regarding

access to all of the documents in the case


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3. Document, document, document• Document all of the management and other party interviews• Document all of the due diligence procedures performedDocument all of the due diligence procedures performed• Document why you selected/rejected valuation methods• Document why you selected/rejected valuation variables

D t h l t d/ j t d fi i l j ti• Document why you selected/rejected financial projections• Use contemporaneously prepared financial projections relied on by

others, if possible


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4. Use generally accepted valuation approaches, methods, and procedures

D ’t d l ti th d (• Don’t use de novo valuation methods (or naming conventions)

• Don’t rely on rules of thumb as value indicationsDon t rely on rules of thumb as value indications5. Use confirmatory valuation approaches and

methods• Explain your valuation synthesis and conclusion

process


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6. Use confirmatory documents, if possible• Look for confirmatory documents• Look for contradictory documents• Explain your selection of the documents

li dyou relied on• Look at all the documents that were

available to youavailable to you• Don’t wear “hindsight blinders” in reviewing

documentsValuation of Businesses, Securities, and Intangible Assets for Bankruptcy Purposes© 2016 National Association of Certified Valuators and Analysts™ (NACVA®). All rights reserved.

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documents


7. Consider all of the debtor company intangible assets in the valuationConsider all of the debtor company contingent liabilities in the valuation

8. Consider the expected income tax affects in all valuation (and other solvency) analyses( y) y• Consult an income tax expert, if needed


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9. In the bankruptcy litigation, your expert report is your best friend• The report should be clear, convincing,

and cogent• The report should be replicable and

transparentTh t h ld b t d ith• The report should be supported with source documents

• “If it’s not in the report you didn’t do it”Valuation of Businesses, Securities, and Intangible Assets for Bankruptcy Purposes© 2016 National Association of Certified Valuators and Analysts™ (NACVA®). All rights reserved.

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• If it s not in the report, you didn t do it


10. Know the limitations of your expertise, rely on specialists when needed• Industry experts• Tax accounting experts• Financial accounting experts• Real estate appraisal experts

P l t i l t• Personal property appraisal experts• Other experts


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Summary and Conclusion

Bankruptcy business, security, and intellectual property valuation services

Bankruptcy valuation analytical issuesp y y Bankruptcy valuation analyst caveats Questions and discussion Questions and discussion


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Documents

Val of Businesses, Securities, and IA for Bankruptc ...Analysis of DIP inbound and outbound intellectual property license agreements (Section 363)property license agreements (Section