Key takeaways
- In a restructuring, valuation decides who gets what: which creditors are paid, which are impaired, and whether existing owners keep anything.
- The core analyses are enterprise value (going concern), a liquidation analysis, collateral valuations, and solvency tests for past transactions.
- The same assets can have very different values under going-concern and liquidation premises, which is often the central dispute.
- Early, independent valuation work improves negotiating leverage, whether the restructuring happens in court or out of it.
When a business can no longer service its debt, the conversation quickly turns from operations to value. Lenders want to know whether they are covered. Unsecured creditors want to know what is left for them. Owners want to know whether they can keep the business. And the bankruptcy court, if the case goes there, needs evidence to decide whether a plan is fair and feasible. All of these questions are, at bottom, valuation questions.
Restructuring paths
- Out-of-court workout: negotiated amendments, maturity extensions, debt-for-equity swaps or partial forgiveness with lenders and key creditors. Faster and cheaper, but requires broad agreement.
- Chapter 11 reorganization: a court-supervised process in which the business proposes a plan to restructure its obligations while continuing to operate.
- Subchapter V of Chapter 11: a streamlined process for qualifying small businesses, with a debt limit set by statute (which Congress has changed several times), a trustee who facilitates a plan, and no requirement to satisfy the absolute priority rule in the same way as traditional Chapter 11.
- Chapter 7 liquidation or an assignment for the benefit of creditors: the business is wound down and assets sold.
DebtRemediationTools.org offers a plain-English introduction to these options in business debt restructuring and managing business debt.
Key valuation analyses in a restructuring
1. Enterprise value (going concern)
The value of the operating business as a whole, typically using discounted cash flow analysis based on the restructured business plan, supported by market multiples. Enterprise value determines the distributable value available to creditors and, in turn, which classes are “in the money.” Our article on enterprise value vs. equity value explains how debt sits between the two.
Projections are critical, and frequently contested. Debtors tend to favor conservative projections (lower value, so creditors take less), while junior creditors argue for higher value (so they are “in the money”). An independent, well-documented analysis is the best way to cut through that dynamic.
2. Liquidation analysis
A Chapter 11 plan must generally satisfy the “best interests of creditors” test: each impaired creditor that votes against the plan must receive at least as much as it would in a Chapter 7 liquidation. That requires a liquidation analysis estimating:
- Proceeds from selling assets on an orderly or forced-liquidation basis, including receivables, inventory, equipment, real estate and intangible assets
- Costs of liquidation, such as trustee and professional fees and wind-down costs
- The distribution waterfall by priority
Equipment and real estate often require separate appraisals. See our machinery and equipment appraisal guide. Intellectual property can be a significant and overlooked asset; see our experience with valuations of intellectual property for bankruptcy proceedings.
3. Collateral valuation
Under the Bankruptcy Code, a secured creditor’s claim is secured only up to the value of its collateral; the remainder is treated as unsecured. The Code directs that value be determined in light of the purpose of the valuation and the proposed use of the property. Whether collateral is valued as part of a going concern or on a liquidation basis can shift millions of dollars between secured and unsecured classes.
4. Plan feasibility
The court must find that confirmation is not likely to be followed by liquidation or further reorganization, unless the plan proposes it. That means testing whether the reorganized business can service its new debt. Debt service coverage analysis is central. DebtRemediationTools.org’s business loan / DSCR calculator illustrates the basic math.
5. Solvency analysis for past transactions
Trustees and creditors’ committees often examine transactions made before the filing, such as dividends, leveraged buyouts, payments to insiders or asset transfers, to see whether they can be avoided as fraudulent transfers. Under the Bankruptcy Code, transfers within two years before the filing (longer under some state laws) can be challenged if the company received less than reasonably equivalent value and was insolvent, or became insolvent, at the time.
Solvency is typically tested three ways:
| Test | Question |
|---|---|
| Balance sheet test | Did the fair value of assets exceed liabilities (including contingent liabilities)? |
| Cash flow (ability to pay) test | Could the company pay its debts as they came due? |
| Capital adequacy test | Was the company left with unreasonably small capital for its business? |
Solvency questions also arise before transactions; boards and lenders often obtain a solvency opinion in advance. See fairness opinions vs. solvency opinions and our solvency opinion services.
Worked example: a simplified recovery waterfall
A distribution company files for Chapter 11 with:
- Senior secured bank debt: $8.0 million (lien on all assets)
- Unsecured trade and other claims: $4.0 million
- Equity owned by the founders
| Scenario | Distributable value | Bank recovery | Unsecured recovery | Equity |
|---|---|---|---|---|
| Liquidation | $5.5 million (net of costs) | $5.5 million (69%) | $0 | $0 |
| Going concern (debtor’s plan) | $9.0 million | $8.0 million (100%) | $1.0 million (25%) | $0 |
| Going concern (committee view) | $12.5 million | $8.0 million (100%) | $4.0 million (100%) | $0.5 million |
The gap between the debtor’s and the committee’s view of enterprise value decides whether unsecured creditors receive 25% or 100%, and whether the founders retain anything. This is why valuation testimony is so often the center of a contested confirmation hearing. Our litigation support services include expert reports and testimony in these disputes.
The owner’s personal exposure
In closely held businesses, owners frequently signed personal guarantees for bank loans, leases and supplier credit. A business restructuring does not automatically release those guarantees. Owners should understand their exposure early and coordinate personal and business strategies. DebtRemediation.org explains this clearly in business debt, personal guarantees and the limits of protection.
Which standard of value applies?
Restructuring valuations rarely use a single label. Courts focus on the purpose of the valuation and the evidence presented, and analyses often reference fair value, fair market value or going-concern value in different contexts. See our overview of standards of value.
How Foxboro Consulting Group helps
We provide bankruptcy valuation services for debtors, lenders, creditors’ committees, trustees and their counsel, including enterprise valuations, liquidation analyses, collateral and intangible asset valuations, solvency analyses and expert testimony.
Frequently asked questions
Because it determines how much value is available and which creditor classes are entitled to it. Small changes in assumed enterprise value can move recoveries between classes and decide whether a plan can be confirmed.
An estimate of what creditors would receive if the business were liquidated under Chapter 7. It is used to show that a plan meets the “best interests of creditors” test.
A secured claim is secured up to the value of the collateral, determined in light of the purpose of the valuation and how the property will be used. Any deficiency is generally treated as an unsecured claim.
To assess whether past transfers can be challenged as fraudulent transfers, by testing whether the company was insolvent, unable to pay its debts or left with unreasonably small capital at the time.
Yes. An independent valuation gives owners and lenders a common factual basis for an out-of-court workout, which is often faster and less costly than a court process.
Next step
Facing a restructuring, or advising a party that is? Contact Foxboro Consulting Group to discuss enterprise valuation, liquidation analysis or solvency work.
This article is for general information and is not legal advice. Bankruptcy outcomes depend on the facts and on the law of the jurisdiction; consult restructuring counsel.
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