Page 47 - Bankruptcy and Reorganization Services

The practitioner will often make adjustments to individual guideline companies to reflect the factors dis-
cussed earlier, or the adjustments may be made to the mean or median of the guideline companies. In
addition to adjusting multiples, practitioners may make adjustments to indicated values for certain fac-
tors. The availability of information may impact the practitioner’s ability to apply the aforementioned
adjustments. Once adjustments that can be made have been applied to the guideline company multiples,
practitioners can then consider the multiples, whether for healthy companies or distressed companies,
adjusted or unadjusted, to develop a frame of reference from which market multiples applicable to the
subject company can be selected.

The comparative financial analysis between the subject and guideline companies discussed previously
often provides the best basis for any adjustments. When the subject company is in distress and the se-
lected guideline companies are otherwise financially healthy, these adjustments will likely reflect this
difference, which may be substantial.

Step 7: Synthesize and Weight Indicated Values

When deriving a value indication, the practitioner must exercise judgment about which multiple (or mul-
tiples) may be most applicable. In scenarios where the practitioner uses more than one multiple to con-
struct a consolidated market multiple value estimate, the practitioner must determine how to synthesize
and weight each component of the final value estimate. This, of course, will require professional judg-
ment, and therefore, the more support a practitioner can give to his or her reasoning for the allocation,
the better the final result will withstand the scrutiny of third parties and the courts.

All else being equal, multiples that require less adjustment are preferable to those multiples that require
more adjusting.

Step 8: Adjust for Ownership Characteristics

It is generally accepted that the guideline public company method results in a marketable minority indi-
cation of value. If the desired level of value for the subject interest is a control value or a minority non-
marketable value, a control premium or discount for lack of marketability may need to be applied. Ra-
ther than applying an acquisition or control premium to a marketable minority interest value, another
generally accepted approach would be to adjust the cash flow or earnings estimates employed in the val-
uation to reflect the cash flow or earnings that could be achieved by a strategic or control owner. A value
estimate developed employing this approach would also be indicative of a synergistic or control value.
Chapter 7, “The Levels of Value Framework, Premiums, and Discounts,” of this practice aid discusses
adjustments for control and marketability.

Step 9: Adjust for Nonoperating Assets and Liabilities

To the extent that any nonoperating assets and liabilities have been removed from the analyses, the value
estimate should be adjusted, either higher or lower, to reflect the impact of such nonoperating assets and
liabilities. In the case of financially distressed or bankrupt companies, common items would include ex-
cess cash, working capital deficiencies, unfunded pension plan liabilities, and assets held for sale, among
others.

Guideline M&A Transaction Method

In the guideline M&A transaction method, consideration is given to prices paid in recent transactions
that have occurred in the subject company’s industry or in related industries. The application of the

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