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  • Achille Ekeu, MBA, CVA

A company that is in financial distress and unable to repay its debts may seek relief from those debtors by filing for bankruptcy, which is a formal legal process. The procedure is intended to provide the debtor with a clean slate by either completely discharging their obligations or by helping them develop a payment plan that would allow them to repay their creditors over a period of time.


There are various distinct types of insolvency, including the following:


Individuals or businesses can file for bankruptcy under Chapter 7, which is often known as a "liquidation" bankruptcy. Under this type of bankruptcy, the debtor's assets are sold to reimburse the debtor's creditors. It is most commonly utilized by people who have a limited amount of assets in addition to significant levels of debt.


Chapter 11 bankruptcy is a sort of bankruptcy that allows firms to reorganize and restructure their operations in an effort to become profitable once again. Many companies choose to file for this type of bankruptcy. Companies are able to continue operations under Chapter 11 while they devise a strategy to return their debts to creditors over a period of time.


Chapter 13 is a form of bankruptcy that allows individuals to return a portion of their obligations over a period of time ranging from three to five years. It is frequently utilized by people who have a consistent income but are unable to repay their debts in full at the current time.


Municipalities, such as cities and towns, can reorganize their finances and debt obligations by filing for bankruptcy under Chapter 9, which is a specific sort of bankruptcy.


Family farmers and fishermen often turn to Chapter 12 bankruptcy to restructure their finances and commitments to creditors in order to better meet their needs.


It is vital to contact a bankruptcy professional in order to establish the most appropriate course of action for a person's or a company's unique set of financial circumstances. There are distinct qualifying requirements and consequences associated with each type of bankruptcy.


The Influence That Interest Rates Have On The Valuation Of Businesses And Their Risk Of Going Bankrupt


The influence of interest rates on the worth of businesses and the likelihood of their going bankrupt is an important topic that is frequently ignored. Changes in interest rates can have a big impact on the value of companies and the process of filing for bankruptcy. Interest rates play an important part in the economy, and these changes can have a significant impact on the economy.


There are multiple ways in which interest rates might influence the value of a firm. For instance, when interest rates are low, it is often simpler for businesses to acquire funding, which can result in an increase in the value of those businesses. Nevertheless, when interest rates are high, it can become more difficult and expensive for businesses to secure funding, which can result in a reduction in the value of the enterprises. This is due to the fact that the cost of borrowing money grows in tandem with the rise in interest rates, which makes it less appealing for businesses to take on debt.


Alterations in interest rates are another factor that might have an effect on the value of a company's projected future cash flows. If interest rates are low, for instance, the present value of future cash flows will be larger, which might result in an increase in the value of the company. On the other hand, when interest rates are high, the present value of future cash flows is lower. This, in turn, might result in a fall in the value of the company.


Additionally, interest rates are an important factor in the bankruptcy process. When interest rates are high, for instance, it might make it more challenging for businesses to reorganize their debt and emerge from bankruptcy. This is due to an increase in the cost of borrowing money, which makes it more expensive for businesses to refinance their debt and repay their creditors. In addition, high interest rates can make it more difficult for businesses to generate sufficient cash flows to repay their loans, which might raise the likelihood that the business will declare bankruptcy.


To summarize, shifts in interest rates have the potential to have a substantial influence on the value of firms as well as the procedure for filing for bankruptcy. It is important for businesses and anyone with a stake in the company to keep track of interest rates and be aware of how fluctuations in those rates might affect a company's financial standing and future opportunities.


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Achille Ekeu, MBA, CVA

The Washington Valuation Group

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  • Achille Ekeu, MBA, CVA

Updated: Jan 27



I. Introduction


a. Definition of Business Valuation

Business valuation is the process of determining the economic value of a business or asset.

It measures what the business is worth in terms of the present value of its expected future cash flows. Business valuation involves analyzing financial statements, assessing the value of assets and liabilities, and considering a range of other factors such as industry trends, the competitive environment, and economic conditions. It is a necessary step in mergers and acquisitions and is used for tax, legal, and financial reporting purposes.


b. Overview of the importance of business valuation

Business valuation is an important tool used to determine the economic value of a business. It is used by investors, lenders, and owners to help make informed decisions about the business. It is also important for tax purposes, as it helps determine the fair market value of the business for tax purposes. Business valuation can also be used to assess the potential sale value of the business. Finally, it can be used to help determine the best pricing strategy for the business.


Here is the video version of this article.

II. Reasons for Business Valuation


a. To determine the value of a business

b. To assess the financial health of a business

c. To determine the fair market value of a business

d. To assess the potential of a business


III. Types of Business Valuation


a. Asset-based Valuation

The asset-based valuation approach is a method of valuation that considers the value of a company based on the value of its assets. This approach is commonly used to value companies whose assets are tangible, such as real estate, manufacturing plants, or equipment. This approach looks at the physical assets of a company and values them based on their fair market value. The asset-based valuation approach can provide a useful measure of a company's worth, but it may not always be the most accurate method of valuation. It is important to consider other factors, such as a company's earnings and potential for growth, when making a determination of value.


b. Market-based Valuation

The market-based valuation approach is based on the principle that the value of a business is equal to the sum of the values of its individual assets. This method looks at how much the company is worth by comparing it to similar companies on the market and taking into account both its tangible and intangible assets. This approach may also include an analysis of the company's financial performance, its competitive advantages, and its overall position in the market. This approach is generally used when a company is looking to sell or purchase another business.


c. Income-based Valuation

Income-based valuation is a method of valuing a business or asset based on its income. It is based on the theory that the value of an asset is equal to the present value of its future cash flows. This type of valuation is commonly used for stocks, bonds, real estate, and businesses. It is an important tool for investors, as it can help them determine the potential return on their investment. In addition, income-based valuations can also be used to compare different investments and assess their relative value.


IV. Benefits of Business Valuation

a. Helps in making informed decisions

b. Helps in setting realistic goals

c. Helps in determining the right price for a business


V. Conclusion

a. Summary of the importance of business valuation

Business valuation is important for a variety of reasons. It can help a business owner determine the fair market value of the business and provide information that can be used to make more informed decisions. It can also provide insight into potential investments, mergers and acquisitions, and other strategic decisions. Valuations can also be used to help resolve disputes or in the event of bankruptcy or dissolution. Finally, they can provide evidence of the value of an owner's equity in the business.


b. Final thoughts on the importance of business valuation

For business owners, potential buyers, lenders, and investors to determine the worth of a company or its assets, business valuation is a crucial tool. It assists in guiding choices regarding whether to seize a business opportunity, make an investment in a business, or buy an already-existing company. A valuation can also serve as a foundation for other decisions, such as determining the loan's value or estimating a company's value for tax purposes. Decision-makers can greatly benefit from the use of business valuation as a tool to better understand the value of a company and make wise choices




The Washington Valuation Group









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  • Achille Ekeu, MBA, CVA

By Achille Ekeu, MBA, CVA

U.S. Inflation

Calculated annually, the U.S. Inflation Rate reflects the average percentage by which the price of a specific basket of goods and services purchased in the United States has increased. The U.S. Federal Reserve uses the inflation rate as a key indicator of economic growth and stability. The Federal Reserve has been monitoring the U.S. economy’s inflation rate since 2012, and if it is higher than 2 percent, it may alter monetary policy. Inflation spiked dramatically in the early 1980s when the economy was in a deep recession. When inflation reached 14.93 percent, the Federal Reserve under Paul Volcker had to take drastic measures.

The current rate of inflation in the United States, as of October 31, 2022, is 7.75 percent. This is a slight decrease from the 8.26 percent rate recorded in September 2022.

Source: YCharts—U.S. inflation Rate[1] Information retrieved December 6, 2022, from https://bit.ly/3NiIFPZ


Effect of Inflation on Consumers

The effects of inflation on consumers’ spending and psyche are well-known. The difficulties it causes in day-to-day life are often discussed. Inflation has affected everything from the cost of transportation to the cost of food and housing. What is less discussed, however, is how the current inflationary period is affecting small business owners and their companies. If you have clients who are business owners, you have probably fielded questions from them about how to protect their operations from the current economic climate. More than 1,500 small business owners were surveyed, and an overwhelming majority cited inflation as their primary concern. When asked to choose between inflation, labor quality, regulations, and tax rates, 34 percent voted for inflation.

Source: Biz-Equity—Inflation[2] Information retrieved December 6, 2022, from https://bit.ly/3h5OEfy


The Impact of Inflation on Business Valuation

There are three value drivers that impact the value of a company: a) the cash flow, b) the growth, and c) the risk. Simply put, Value = Cash Flow(1+g)/Risk. Now, to measure the impact of inflation on business valuation, we need to analyze the impact of inflation on these three value drivers.


a) Impact of Inflation on Cash Flow

Valuation experts typically use cash flow as their primary metric of economic benefits. So, how does inflation affect cash flow? The general rule is that when inflation is high, businesses will raise prices to consumers. Consumers’ reduced spending has a direct effect on a business’s top line (revenues) and bottom line (profits). Since cash flow is a direct result of income or profits, it stands to reason that high inflation has a negative effect on cash flow. As a result, it is safe to assume that the company’s value will fall as well.


b) Impact of Inflation on Growth

When evaluating whether to invest or purchase ownership stakes in a business, one of the most essential factors investors consider is the firm’s sustainable growth rate. Due to the prospective nature of valuation, knowing the company’s long-term development prospects is essential for any interested party. High inflation dampens corporate expansion potential since it increases both direct and indirect expenses. As costs are passed through, the customers’ desire for non-essential items drops as a result, slowing economic growth.

For example, long-term leasing agreements with inflation-linked escalation provisions may further increase overhead costs. Inflation may also cause vendors and service providers to raise prices. In a tight labor market, salary increases may help retain competent workers. Rising living costs for low-wage workers might lead to attrition for more costly workers.

The combined effects of the company’s slow growth and low sales hurt its worth.


c) Impact of Inflation on Risk (Discount Rate)

The cost of capital, often known as the discount rate, is the third value driver that may influence the value of a firm. Methods such as the Ibbotson Build-Up technique, the Capital Assets Pricing Method (CAPM), and the Weighted average Cost of Capital (WACC) are examples of some of the approaches that may be used in business valuation when calculating the discount rate that will be applied to a particular firm.

The increase of the risk-free rate, which is the rate that is released every day for the 20-Year Treasury Bond, as well as the rising of the cost of equity and the cost of debt, are where the influence of inflation can be seen to have an effect on the discount rate.

These rates tend to go up whenever inflation does, and as a result, the cost to get funds increases as well. The risk profile of the company is raised and makes it unattractive to investors.

When the discount rate is greater, the value of the firm is negatively impacted, which means that the value of the company is lowered, sometimes by a large amount.


Industries Most Affected by Inflation

Despite the fact that inflation is now pervasive across the economy, not all sectors have been hit equally. Researchers on behalf of Self, calculated the one-year price change from March 2021 to March 2022 in order to identify the industries[3] most affected by inflation.

The table below presents which industries have been the most affected by inflation.

Source: Bureau of Labor Statistics Producer Price Index (PPI)

[3] Moneytalksnews.com: 15 Industries Most Affected by Inflation. Information retrieved on December 6, 2022, from https://bit.ly/3h1e0v9


Conclusion

When there is inflation, a company’s actual earnings fall since a dollar can now only buy a lower quantity of products and services. In other words, a million dollars in “earnings” today will not go as far as a million dollars in “profits” two years ago when it came to buying resources (inflation is a hidden tax).

Profit preservation—and growth—are essential for a company’s long-term viability. In times of high inflation (if possible), cash flow is the primary driver of business valuation, and a company is often sold with the hope that it will continue to earn profits in the future. A company’s value increases in proportion to the amount of cash it can earn and maintain.



Achille Ekeu, MBA, CVA

The Washington Valuation Group


Achille Ekeu, MBA, CVA, is the President and CEO of the Washington Valuation Group, LLC, and a former Board member who served on the Valuation Credentialing Board (VCB) of the National Association of Certified Valuators and Analysts (NACVA). He was also the State Chapter President of NACVA for Maryland and Washington DC. Mr. Ekeu is the Author of a book titled “30 Frequently Asked Questions in Business Valuation”. He focuses on business valuations for tax, transaction, and litigation purposes. He was just recently appointed by Court Order on a big litigation case in Baltimore City, Maryland.

Mr. Ekeu can be contacted at (240)274-9570 or by e-mail at achille.ekeu@washingtonvaluation.com.


Note: This article was first published on QuickRead on December 22, 2022.

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