Distressed Valuation

We were commissioned to carry out a company valuation to support the creditors’ decision-making in the context of a planned self-administration (insolvency proceedings). The background to this was the requirement to initially assess the various realisation scenarios – including the continuation of the company by the existing owners – in isolation and then to assess their relative attractiveness. 

The valuation of companies in insolvency has several special features. On the one hand, the existing company situation must be partially abstracted from, as it is precisely the – as yet undetermined – continuation of the company that is to be valued. However, existing insolvency issues must not be completely ignored in the company valuation, as even if the company continues as a going concern, there may still be indirect insolvency risks (adverse behaviour of stakeholders in view of the company’s specific past, such as the possible departure of key employees who would prefer to work in a company without such a history or the scepticism of customers and suppliers who may turn away from the company or demand more attractive conditions for them). Secondly, the specific capital structure must first be abstracted from, as the question of the distribution of enterprise value across the different types of capital will only be answered “as a result” of the analysis, valuation and subsequent negotiation. Thirdly, a company valuation in such a special situation cannot be based on a prolongation of past conditions, which regularly makes forecasting in the existing setting challenging. Fourthly, restructuring measures with implementation uncertainties provide additional forecasting uncertainties. And finally, fifthly, the risk situation – even if there is no longer a specific threat of insolvency – is still regularly not comparable with that of fully healthy companies. The latter also makes the use of healthy peers as comparable companies regularly challenging. 

The result was a decision model on the basis of which the creditors were able to assess the scenario of continuing the company while retaining the legal entity in terms of value and risk.