Valuation practices under business rescue circumstances in South Africa

Abstract

Background: A business rescue plan should indicate the benefits of adopting a business rescue plan as opposed to the benefits of immediate liquidation. Performing a valuation is thus a vital aspect of the business rescue process as the estimated values determine the amount to be divided between creditors and, if possible, shareholders. Conventional valuation methods have the underlying assumption that the business is a going concern (based on liquidy and solvency tests). However, a company in business rescue is not necessarily a going concern, nor in liquidation, leaving the company in a grey area in terms of valuation.Aim: This research explored how the business rescue value of a financially distressed company is determined.Setting: The setting for this study was South Africa.Method: Thematic analysis of qualitative data collected through 11 semi-structured interviews with senior business rescue practitioners (BRPs).Results: When the intention is to return the company to solvency, the BRPs prepared a short-term, undiscounted cash flow budget to determine the business rescue value, but without including a terminal value in the projected cash flows. In contrast, when the intention is to obtain a better return compared to immediate liquidation, BRPs follow an asset approach to determine the business rescue value. The results also showed that the business, digital and relational acumen of the BRP is a major influencer in the business rescue value.Conclusion: The financial elements identified and substantiated in this study may serve as best practice guidance in the business rescue industry and lead to an expansion of the existing valuation theory.