Types of valuation for R&I lawyers
Types of valuation for R&I lawyers

The following Restructuring & Insolvency guidance note provides comprehensive and up to date legal information covering:

  • Types of valuation for R&I lawyers
  • Going-concern basis vs liquidation basis vs indicative bids
  • Discounted cashflow (DCF)
  • Comparable multiples
  • Asset value (or accounting or book value basis)
  • Liquidation basis
  • Indicative (or market bids)
  • Other relevant factors
  • Court guidance

Finding where value breaks governs the shape of any restructuring deal and determines who has a seat at the negotiating table (see Practice Notes: Where the value breaks and negotiating strength and Blocking majorities).

Different creditor groups may commission different valuations as it affects their ultimate returns. There are no statutory provisions specifying which valuation method should be used, so parties rely on sporadic court guidance. This lack of certainty inevitably leads to creditor challenges as parties chose valuations which support the most favourable outcome for themselves.

Generally, it is good practice to use several valuation techniques to obtain a range of values.

Going-concern basis vs liquidation basis vs indicative bids

The going concern basis (or enterprise or firm value) assumes the continued existence of the debtor company. The three types of valuation are:

  1. discounted cash flow (DCF)—net present value of future cashflows

  2. comparable multiples—looking at comparable companies

  3. asset-based value—valuing the company's specific assets

Alternatively, if there is a ready market for the business, the company may engage an investment bank to seek indicative bids.

The liquidation basis assumes the company is liquidated and assets sold on a fire-sale basis, generally resulting in a lower valuation.

The going concern and liquidation valuations usually set the upper and lower limits respectively and therefore the parameters for negotiations.

Discounted cashflow (DCF)

This test calculates the net