Business Valuation in Distressed Situations Flashcards
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Which valuation method is most commonly used to establish 'enterprise value' in a US Chapter 11 plan of reorganization?
Answer: Comparable company analysis combined with discounted cash flow (DCF)
Courts and practitioners typically use a combination of comparable company analysis and DCF to establish the going-concern enterprise value for plan confirmation purposes.
In distressed valuation, 'orderly liquidation value' (OLV) differs from 'forced liquidation value' (FLV) in that:
Answer: OLV assumes adequate marketing time to maximize asset sale proceeds
OLV assumes assets are sold over a reasonable period to qualified buyers, yielding higher proceeds than FLV, which assumes an urgent, compressed sale timeline.
The 'going-concern premium' in a distressed business valuation represents:
Answer: The value of the assembled business above its liquidation value
The going-concern premium reflects the additional value created by an operating business — its customer relationships, workforce, and operational infrastructure — above what asset sales would yield.
When applying a DCF to a distressed company, the discount rate should reflect:
Answer: A risk-adjusted rate that accounts for the elevated uncertainty and distress risk
A higher discount rate is used for distressed companies to account for greater uncertainty in projected cash flows and the elevated risk of plan failure.
Which approach is most useful for valuing a distressed company with highly uncertain future cash flows?
Answer: Liquidation analysis provides the floor while DCF and market comps establish the range
Using liquidation analysis as a floor value combined with going-concern approaches provides a defensible valuation range for plan negotiations.
In the context of distressed M&A, a '363 sale' refers to:
Answer: A court-authorized asset sale under Section 363 of the Bankruptcy Code, free and clear of liens
Section 363 of the Bankruptcy Code allows a debtor to sell assets free and clear of all liens and encumbrances with court approval, providing clean title to buyers.