The use of hindsight is an issue with most all valuations, but it’s particularly controversial in a bankruptcy context. This is because everybody knows what actually happened to the debtor company (it filed for bankruptcy protection), so the tendency to use hindsight is quite common, points out Robert Reilly (Willamette Management Associates). He cautions that valuation analysts who do bankruptcy-related assignments should expect their work to come under a great deal of scrutiny because most of these engagements are done within a litigation or some other adversarial context. One area of potential trouble is the use of hindsight.
What to do: Most bankruptcy valuations use a retrospective valuation date because a specific historical event triggered the distress, such as a dividend payment or a financing transaction. There is usually controversy over when the actual debtor company events would have come to light. The courts seem to adopt the known or knowable rule, Reilly says. Therefore, the analyst should consider only that information that was known or knowable as of the time of the valuation date.
Other issues have emerged that analysts will encounter when performing a valuation in a bankruptcy context. They include income tax effects on debtor company value, the cash flow test within a solvency analysis, using the market approach in an inactive market, and more. During a recent BVR webinar, Reilly offered his advice on how to handle these issues.
Extra: Two new resources of note: A Practical Guide to Bankruptcy Valuation, 2nd edition, by Reilly and Dr. Israel Shaked, and Admitting Expert Valuation Evidence Before the U.S. Bankruptcy Courts,by Stan Bernstein, Susan H. Seabury, and Jack F. Williams.
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