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business valuation

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  • business valuation

    My husband and I are considering filing bankruptcy as our credit card bills have gotten the best of us. I'm VERY appreciative of the information I've gathered on this board but do have a couple of questions that hopefully someone can help me with.

    We don't own a home, don't have much value in our car, and have very little personal property. But we do own a small business that is registered as an S-corp. The business doesn't make much money--pretty much just covers expenses. But my question is, how will a trustee value our business? Will it be based on the actual inventory that the business holds, or will he/she consider the capital stock and/or debts of the s-corp? In other words, if we have $20,000 worth of inventory, $2,000 in the business account, and a $25,000 dollar debt, will the value of the company be -$3,000? Also, if we have 3 years remaining on our lease at 2k/month, does this count as a debt of the business?

    And what about advertising that is in place and name recognition, does that add to the value, or do they simply look at it from a numbers standpoint?

    Any insight would be appreciated!

  • #2
    Generally the value of your stock is based upon the liquidation value of the business. If you were to shut your doors and sell all corporate assets, would there be enough to pay all corporate debt including the long term commercial lease? If the answer is "no", then the debts exceed the value of the assets and your stock is worthless.

    HOWEVER, you mentioned the advertising and phone number. This is part of the "blue sky" value of the corporation. You have to ask yourself if there is someone out there willing to pay $$ for your stock just to gain that "blue sky" even with the debt associated with it. Is there a competitor who would like to take over the corporation for its name, advertising, phone number etc? If so, you need to think long and hard before you leap into a Chapter 7.

    The Chapter 7 Trustee will investigate the value of the stock. If he thinks he can find a buyer for it he will try to sell it. If you are losing sleep over this issue then don't file a 7. Look into a Chapter 13 instead. If you are below median income your Plan could be as short as 36 months.



    • #3
      Thanks for the reply, Des.

      We had originally intended to file a 13, but after reviewing our exemptions, it looks as if we may just skate through as a 7. As I said before, we don't really have any major assets outside of the business. But perhaps we'd be better off to "force" a 13 if our business valuation will receive less scrutiny.

      Considering our commercial lease, the value of our company is far and away a negative number. And even without the lease, it is pretty much a break even proposition. But I can't be sure that there isn't someone out there that wouldn't like to have corporate name and advertising.

      So if we are right on the fence of having non-exempt assets versus all exempt assets, is there any harm in slightly overvaluing our assets to force us into a 13? And if that is the case, can you file a 13 with only minimal non-exempt assets? In other words, can we file a 13 with only $3,000 in unprotected assets resulting in a monthly payment of $83 when our disposable income is $250/month?

      Again, any thoughts are appreciated.


      • #4
        Originally posted by TTxngal View Post
        So if we are right on the fence of having non-exempt assets versus all exempt assets, is there any harm in slightly overvaluing our assets to force us into a 13? And if that is the case, can you file a 13 with only minimal non-exempt assets? In other words, can we file a 13 with only $3,000 in unprotected assets resulting in a monthly payment of $83 when our disposable income is $250/month?
        First, you do not need to have non-exempt assets to file a Chapter 13.

        Second, in a 13 you value your assets based upon the same principals as you would use if you filed a 7. The only difference is that you are not liquidating the non exempt assets. Instead you are paying the value of those assets to your general unsecured creditors over the life of the Plan.

        Third, your Plan payment is based upon several factors only one of which is the value of the non-exempt assets, which may be the "base" you have to pay. You also will pay any priority taxes, secured creditors, attorney's fees and the Trustee's fee. Further, even if you set up a minimal payment, you will pay more than the minimal amount if you can afford to do so.

        Hope this helps.




        • #5
          There are different sorts of valuations for a business - there can be a liquidation value, going concern, book value, etc.

          Some of the other things that might have to be taken into account in valuing the business are accounts receivable and goodwill (among others).

          For a personal banruptcy, the Trustee will be looking at the value of the stock of the business, and that can be different from the value if there are multiple shareholders and there will be "discounts" (like minority shareholder, market discounts, etc) that can be applied to reduce the value of the stock. The value will consider both assets and liabilities.

          To me, if you are able to draw out only your salary and nothing else, and your debts exceed physical assets, then there really is no "profit" for a hypothetical investor and there will be likely no real value to the business that is worth anything to the Trustee. When it is remembered that the Trustee can only sell the stock in the business that will not happen because any investor would want your assets from the business without buying the stock (and assuming the potential liabilities).

          I have valued the stock in businesses with your basic description at $0, with no real trouble.


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