As it happens, a bankruptcy/district court case has just come down right on point. The facts: The debtor provided payroll and benefits servicing to small businesses. But it was built on a “Ponzi-like” scheme by which the controlling principals used incoming cash to snap up smaller entities or worse, line their own pockets, taking a total of $130 million. The trustee sought to recover those transfers as well as the debtor’s 2001 acquisition of a company for $17.5 million. To do so, the trustee had to show the debtor was insolvent at the time of the transfers and paid more than reasonably equivalent value.
At trial, the president and CFO of the target company testified it was worth at least $10 million at the time of sale and was trading at $0.03 per share. They also pointed to a contemporaneous “strategic” appraisal that valued the business in excess of $10 million. Further, comparable acquisitions valued like businesses at $3,000 per serviced worker, which translated into a $30 million value for the target company. Industry practice used a “standard” multiple of 6x EBITDA, which generated a price of precisely $17.5 million at the time of sale.
The principals failed to authenticate the contemporaneous appraisal as anything but a business record, however, and did not present its authors or an independent expert at trial. By contrast, the trustee offered a credentialed valuation analyst, who testified the debtor had “no value” at any time during its operations. Moreover, at the time of purchase, the target company had lost a major client, leaving it with little or no business, negative earnings, and liabilities that exceeded assets by $1.9 million—which translated into a zero value.
The bankruptcy court adopted the expert’s values. On appeal, the federal district court (S.D. Fla.) affirmed, noting in particular that neither the president nor the CFO had any “professional training or experience as a business valuation appraiser.” Moreover, just because the transaction was arm’s length and included advisors—such as attorneys—and a "strategic" appraisal, this did not “constitute competent and credible evidence that [the target] had value at the time to any but an unscrupulous company like the debtor.” Read the complete digest of In re Certified HR Services Co., 2012 U.S. Dist. LEXIS 136956 (Sept. 25, 2012) in the December Business Valuation Update; the court’s opinion will be posted soon at BVLaw