Page 63 - Bankruptcy and Reorganization Services

face value of the debt or the amount that would be indicative of the amount of an allowed claim
in a bankruptcy proceeding may provide the appropriate estimate.

5. If appropriate, make adjustments for income taxes and transaction costs.

6. Subtract the value of the liabilities from the value of the assets to derive the value of total equity.
If the company has preferred stock or other senior equity securities, then the equity value must
be reduced by the value of those securities to determine the value of the common equity.

7. Perform "sanity checks" to determine the reasonableness of the values computed in steps (1)
through (6).

8. Determine whether the net value computed should be adjusted for any applicable discounts. fn 27

Valuing Individual Assets

The standard categories of individual assets valued using the asset approach are financial assets, real es-
tate, tangible personal property, intangible real property, and intangible personal property.

a. Financial Assets. fn 28 Financial assets typically include cash and cash equivalents, marketable
securities, accounts receivable, prepaid expenses, notes receivable, and other assets. The practi-
tioner will need to review each asset and determine what adjustments from book value are neces-
sary. The following are examples of common adjustments to balance sheet accounts:

i. Cash and cash equivalents: typically no adjustment.

ii. Marketable securities: adjust to fair market value based on exchange prices.

iii. Accounts receivable: calculate the present value of the expected realization (or collec-
tion) of the receivables, incorporating an analysis of the uncollectible accounts. For com-
panies in financial distress, the collection of receivables can become uncertain, resulting
in a lower realization value than for a going concern.

iv. Prepaid expenses, such as prepaid rent, insurance premiums, and utility deposits: estimate
the net realizable value. For companies in financial distress, prepaid expenses may have
lower values than for going concerns. For companies that face possible liquidation, cer-
tain prepaid expenses may have little or no value.

b. Notes receivable and other assets. Estimate the net realizable value, which may require adjust-
ments for collectability and various contractual rights.

c. Real Estate. Real estate assets can be appraised using a cost approach, sales comparison ap-
proach, or income approach. Whenever practical, all three approaches to value should be consid-
ered to increase the reliability of the appraisal. Note that real estate appraisal typically requires

fn 27 Fishman, Pratt, Griffith, and Wilson, Guide to Business Valuations, 701.16.

fn 28 Pratt and Niculita, Valuing a Business, 357.

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