To businesses in dire straits, this law has recently offered the opportunity to make the business healthy. Without debt relief, wonderful businesses would fail.
The valuation of the company plays a central role here in various ways. Companies must be sufficiently viable to make use of this possibility.
Viability of company
If a company is profitable for a longer period of time and can meet its financial and organizational obligations, the company is in principle viable. The financial factors that play a role here are obvious.
However, a very important question that must also be asked is whether the entrepreneur himself is capable of turning the crisis situation around to a financially healthy one. Is he or she mentally fit enough to bend the situation? Is the entrepreneur sufficiently able to respond to changing market conditions? If these questions provide solace toward the future, one can begin to work things out.
Determining reorganization value
Through a valuation, the reorganization value is determined and substantiated. This will reflect the(going concern) value of the company with a healthy structure, after a successful operational reorganization. The DCF(discounted cash flow) method will be leading.
Note that when calculating the reorganization value, the upstream suppliers (creditors) who are part of the WHOA agreement are taken into account. A clean valuation must include their positions before and after the WHOA agreement. Are they still willing to provide their products and/or services under the same conditions after the agreement?
Estimating future success
The problem is that the most commonly used valuation methods assume a "healthy" company. A (subjective) estimate of future success provides guidance for valuation. How much discussion this will generate in practice, time will tell.
From a valuation perspective, therefore, not only the restructuring of the debt position (liabilities side) should be considered, but also a reorganization of the assets side of the balance sheet with the aim of improving the structural earning capacity. The value after this intended restructuring should then be compared with the expected value in the event of bankruptcy (liquidation value).
The liquidation value can be determined by means of the 'regular' liquidation valuation methods The liquidation value is the direct proceeds value in the event of a (forced) sale of the assets minus the debts. It is important to note here that the liquidation value is an estimate since the company is not (yet) actually in a bankruptcy scenario. If it turns out that the reorganization value is higher than the liquidation value then a proposal can be worked out and offered to the creditors.
