The Problem with Valuing Assets

Getting the best value for assets is the key objective of an office holder in a formal insolvency process.

Where a business is insolvent it is unable to pay debts as they fall due and/or it has liabilities that exceed the total value of assets. As a result the desire to maximise the value of asset realisations is of paramount importance to creditors, shareholder and other stakeholders. An office holder will always strive to achieve the best possible value given the particular circumstances surrounding the assets in question.

A key objective for a purchaser (or investor) conversely is not to pay more for an asset than it is worth.

There are those that will no doubt argue that any price can be justified if there are purchasers willing to pay that price – but TMP argues there has to be some reasoning and rationale behind a sale price.

At TMP, Libby Aird-Brown was recently involved in an interesting case where, in physical numbers, there were a great many assets. Each asset was tiny in size. Individually, each asset was of negligible value, specific to certain geographical areas, cyclical in demand and dependent on another industry’s whims.

Recognising where difficultly and uncertainly lies (and understanding the reason for this) has to be an important part of the valuation process.

The complexities in this example made the process of valuation very difficult for the valuation agent. On the one hand, the assets could have significant value. On the other, they were an onerous liability with which the office holder would have to deal.

At the outset, consideration was given to Administration as a way to sell the business and assets. This could have potentially maximised the value for the assets, but the company was not in a position to fund trading. The bank had also withdrawn support. The period of time required to negotiate any deal that would increase the asset value sufficiently to justify Administration, would also increase the company liabilities significantly.

Liquidation was therefore considered the only available insolvency procedure and was appropriate in respect of the directors’ duties to the general body of creditors.

The outcome was good in that a reasonable amount was realised up-front for the assets from a willing buyer, together with anti-embarrassment clauses being agreed upon. The anti-embarrassment clauses meant that should the assets generate good returns for the purchaser, then the creditors of the insolvent company would benefit.

The reason this worked well was that a key premise of valuing those (or any) assets is that reasonable assumptions can be made, and the right value can be established from those reasonable estimates.

In this case the valuation agent was able to demonstrate reasonable assumptions given the peculiar nature of the assets. He could then demonstrate reasonable estimates given the potential future value of sales to a trading business. The buyer accepted it was not just a question of a number or what he wanted to pay for the assets, but that it was a question of the value those assets were likely to generate for his business.

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