What’s It Worth To You?

Business valuationIf all the children in Lake Woebegon are above average, all the small businesses our clients run are quite valuable.

If the Chapter 13 trustee is asking the question, anyway.

I rail when the Chapter 13 trustee’s business questionnaire asks “how much would you sell your business for.”

Phrased that way, the question implicates all kinds of facts that aren’t in play in Chapter 13.

First, what would the debtor have to get to part with the business that supports his family?

Second, it assumes that the debtor is a party to the sale, and can deliver a non compete agreement and even some training for a business buyer.

Third, the question touches the entrepreneur’s self worth. Who among us wants to admit that the enterprise you’ve devoted heart and soul to has no objective value to anyone else?

Recalibrate

So, let’s go back.  You represent a sole proprietor in a Chapter 13 case.  The best interests of creditors test for confirmation requires that the plan provide creditors at least what the creditors would receive if the case had been a Chapter 7.

We’re not talking, then, about what the debtor could sell the business for if he were to sell out.  We’re looking for what could a Chapter 7 trustee get for the business.

Let’s imagine a sale of a small business by a Chapter 7 trustee.  What happens?

  • Trustee shuts the business down, because he doesn’t want responsibility for operating it post petition.  Going concern value is gutted.
  • Trustee seeks buyer.  Only trustee doesn’t know anything more about the customer base and the business operation than the debtor tells him at the 341 meeting.
  • Any buyer of the business has no assurances that the debtor will not open up the self same business next door to his old shop and compete with the buyer.
  • Buyer gets no transitional training from the man who ran the business before him.

So, what is this business worth?

In a Chapter 7 context, it’s probably little more than the value of the lease;  the equipment;  the inventory at liquidation prices; and the accounts receivable, suitably discounted.

Vigilance

Putting a value on the business in writing usually comes up in two places:  on Schedule B and on the trustee’s business questionnaire.

The question for counsel is whether there is any saleable goodwill in the business:  value over and above the value of the assets,  profits over and above what a passive business owner would have to pay someone to do your client’s job in the business?

Value may well be a question at the 341 meeting.

Prep your client to think about the question beforehand.

I prompt that consideration by asking my client what would his estate get if he were run over by a truck and the survivors had to sell the business.  And that scenario probably overstates the value, since a buyer wouldn’t have to worry about competition from the deceased client.

If the debtor understands that he may have to live with the number he utters at the 341 meeting, and pay it dollar for dollar into the plan, he may approach the valuation question with appropriate caution.

Your mission, as counsel, is to foresee the issue and prepare papers and client to deal realistically with value.

That’s the value that you, as debtor’s counsel, bring to the table.

Image courtesy of Flickr and bsabarnowl.

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