When an owner of a business is looking to sell the business, the immediate question is “what is it worth?” In a traditional “deal”, the question is often followed by consideration of multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) and industry standards. This exciting time inspires the entrepreneur or patriarch of a small family business to consider what he or she can do with all the money about to be collected from a career of hard work and enterprising. This is commonly referred to as “enterprise value” and there are countless professionals skilled in developing a market to squeeze every last drop of value out of the business to create more “value.” Obviously, in this situation, all creditors are fully paid and little to no consideration is paid to their concerns. With a healthy growing company, “enterprise value” carries the day.
In contrast, bankruptcy allows a debtor to use provisions of the bankruptcy code — namely Section 363 — to generate value for creditors by forcing the sale of assets free and clear of all liens and claims. The goal here, again, is to maximize value, but more often than not, value in a distressed situation (either in or prior to filing bankruptcy) is determined by “what the assets can bring” or “asset value.” This “asset value” serves as a lifeline to the small business owner whose business has fallen on tough times and has its lender (holding, of course, a personal guarantee) demanding an exit from the financing and relationship.
Make sure your business lawyer is willing to listen to your needs and your concerns and is equally as skilled in maximizing the value of your business.