How do you adjust the comparables and multiples for valuing distressed or bankrupt entities?

In more simple terms as a business person I need to decide whether I could salvage the business if it is a business that has prospects, has the right product and has a market. If the failure was due to bad management then I would evaluate . If the business was doomed regardless of the quality of its managers then I will walk away.

Risk Adjustment: Increase discount rates or adjust multiples for higher risk. Focus on Assets: Emphasize asset-based valuation methods like liquidation value. Consider Specifics: Account for unique distress-related factors impacting the company. Market Comparison: Compare distressed entities to others sold or valued in similar situations.

Distressed companies are a different class . Bankrupt companies are a completely different class . Both should not be in the same sentence firstly . For Distressed companies we need to see if the problem is temporary or a structural one and if the problem can be solved in a reasonable timeframe . The distress discount of about 30% may be needed in Value to bring in fresh capital required for a turnaround . So do a normal valuation and knock of 30% . Steeper discounts may be required if credit flow is difficult . Bankrupt entities are a sum of the realisable value of assets plus value of the brand name . It’s a gone concern .

Is the entity a "good business / bad capital structure" situation, or a "bad business / bad capital structure" situation? If the former, use the post-reorg enterprise value. If the latter, use liquidation value.

what I will do personally First, I'd analyze financial performance, adjusting comparables for declining revenues and increased expenses to accurately reflect valuation. Second, I'd assess asset valuation, applying discounts for impaired assets. Third, I'd evaluate liabilities, adjusting comparables to reflect debt impact for a precise valuation

In adjusting multiples for comparables selection, consider the distressed entity's unique circumstances. Prioritize recent and relevant data, normalize financial statements, and apply higher discount rates to reflect increased risk. Look for transactions involving distressed companies, adjusting multiples to account for urgency or distress-related factors. Evaluate the target's industry challenges, capital structure, and seek expert input for a more accurate and tailored valuation.

Before beginning to calculate any multiples, EBITDA needs to be closely analyzed. Nowadays, Adjusted EBITDA is usually ~30% higher than actual. Analyze the business well enough to remove any pro forma, run-rate, or PF run-rate adjustments to get an accurate level of "cash" EBITDA. Once that figure is known, I subtract maintenance CapEx and cash interest (PF for the new cap structure) to calculate my own FCF level. I like to see at least a 10% yield to net debt and yield to equity (market value based on PF shares o/s and expected or actual secondary reorg trading levels). Cash is king. A company can have >$1B of EBITDA but be FCF negative. Examine the cash flow statement before the income statement to get a more accurate picture.

When valuing distressed entities, typical multiples like EV/EBITDA might not fit due to unstable earnings. Consider these adjustments: Alternative Multiples: Use EV/EBITDA-Capex or EV/FCF for a clearer picture of cash generation and operational efficiency. Higher Risk Premium: Adjust multiples to account for increased risk and volatility. Focus on Assets: Prioritize asset-based metrics if earnings are unreliable. These adjustments ensure that the valuation accurately reflects the entity’s financial state and the higher risk involved.

Additional Factors: Estimate the recovery rate based on historical data of similar bankruptcies or restructurings within the industry. This rate significantly impacts the valuation, as it affects the terminal value assumption. Determine the liquidation value of the assets. This involves estimating the proceeds from selling assets under distressed conditions and can serve as a floor value for the company. Include the estimated costs of restructuring in the valuation. These costs can be subtracted from the entity’s value or treated as an adjustment when applying multiples. Analyze current market conditions, including the availability of financing, investor sentiment towards distressed investments, and overall economic health.

When selecting comparables for valuing distressed or bankrupt entities, consider factors like the timing of financial data, relevance of recent information, normalization of financial statements, adjustments for increased risk, industry-specific challenges, and the unique circumstances of distressed sales. Additionally, assess the capital structure, prioritize transactions involving distressed companies, seek expert input, and account for legal and regulatory constraints. These considerations ensure a more accurate and context-specific valuation for distressed entities.

Several factors impact the valuation of distressed or bankrupt entities: Recovery Rate: Estimate what creditors might realistically recover in bankruptcy. Liquidation Value: Assess what the entity’s assets would fetch in a fire sale. Restructuring Costs: Account for expenses related to bankruptcy or restructuring. Market Conditions: Consider current economic factors affecting demand and capital availability. Incorporating these factors helps adjust the valuation to reflect both the risks and potential recovery scenarios.

Valuing distressed or bankrupt entities necessitates adjustments to comparables and multiples to reflect the heightened risk and potential for recovery. This involves selecting comparables that have also faced distress or restructuring, and using multiples that consider the entity's operational and financial health, such as EV/EBITDA, adjusted for expected restructuring costs and recovery rates. A liquidity discount is often applied to account for the limited marketability and increased uncertainty. Additionally, scenario analysis is critical, evaluating various outcomes from liquidation to turnaround, to provide a range of valuations reflecting the distressed entity's unique circumstances and potential paths forward.

I agree with the principles applied, however as an ongoing concern there is no mention of currency exposure in reporting earnings or supply chain fx exposure as well. Obviously you cant cover all aspects, but as businesses are more globalized and intertwined fx issues are paramount. Some companies during this past quarter experimented substantial fx losses in their reporting.

Amid economic turmoil, tasked with valuing a distressed company, I prioritized recent financial data and normalized statements. To reflect increased risk, higher discount rates were applied. Industry challenges were factored in, and potential liquidation considered. Seeking comparable transactions, adjustments were made for urgency. Understanding the capital structure and prioritizing claims in potential bankruptcy were crucial. Expert insights and scenario analysis fine-tuned the approach. The art lay in selecting comparables mirroring the distressed entity's struggle, ensuring a realistic and defensible valuation amidst legal constraints.

It's difficult to value distressed companies when they are undergoing a simultaneous merger while in bankruptcy. For example, AMF Bowling back in 2014. The 2L holders proposed a plan for AMF to merge with the boutique 8-center chain Bowlmor, have management roll over their entire equity stake, and have them lead the PF combined company upon emergence. There was a complicated master lease with the lessor, iStar, that needed to be restructured and subsequently revalued. No one wanted to go near this. They thought "bowling" and wrote it off without performing even minor DD. They would have discovered massive low-hanging fruit and insane operating leverage that enabled the most profitable investment of my career with >10x return in ~4-years.