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Valuing a business in a Chapter 11 bankruptcy

When a Tennessee business faces the possibility of filing a bankruptcy petition, one of the first questions that is asked is whether to seek reorganization under Chapter 11 or dissolution under Chapter 7. If the business chooses, the former, its executives and advisors will be required to answer a number of questions about the value of the company and its assets. Understanding these questions and how to answer them is a necessary prerequisite to choosing between Chapter 11 and Chapter 7 business bankruptcy.

Under Chapter 11, the company has the opportunity to prepare a reorganization plan that includes extra time for paying existing obligations and the possible reduction of some debts. The bankruptcy code requires that a plan of reorganization establish a "reorganization value" that will provide outcomes for shareholders and creditors that are better than a Chapter 7 dissolution. Several methods are available for making this determination.

The first method is establishing the company's liquidation value. This method assumes the sale of the company's assets over a short time. The ease of selling an asset will affect its value - readily salable assets will command a higher relative price than assets that cannot be easily sold. The second method is reorganization value, which is the amount that a willing purchaser will pay for the company's assets. The viability of the reorganization plan is usually measured by a cash-flow projection that projects future payments to creditors and other cash flow and working capital expenditures. After the bankruptcy proceeding is complete, the company will need "fresh-start accounting" to allocate the value of the company's remaining assets. This process is very similar to asset value allocations that follow a merger.

Any business that is on the threshold of bankruptcy may wish to seek advice on various valuation techniques before making a final decision to elect either Chapter 7 or Chapter 11. The advice of an experienced bankruptcy attorney can help ensure that the choice will benefit the company and its shareholders.

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