Several major companies have already filed for bankruptcy during the COVID-19 crisis and many more large and small businesses are expected to follow suit. If you are a creditor of a company that is liquidating, it may be challenging to get back what you are owed. That is where a solvency opinion can help. An expert determines whether the company could meet its long-term interest and repayment obligations when it made — or did not make — payments to creditors.
Examining the Subject
Solvency experts consider many issues when examining a business. But ultimately, the outcome of three tests enable an expert to determine solvency:
- Balance sheet. At the time of the transaction at issue, did the subject’s asset value exceed its liability value? Assets are generally valued at fair market value, rather than at book value. The latter is typically based on historic cost, and fixed assets (such as vehicles and equipment) may be reduced by annual depreciation expense. But the balance sheet is just a starting point. Adjustments may be needed to balance sheet items so that they more accurately reflect the fair market value of assets.
- Cash flow. This test examines whether the subject incurred debts that were beyond its ability to pay as they matured. It involves analysis of a series of projections of future financial performance. Experts consider a range of scenarios. These include management’s growth expectations, lower-than-expected growth, and no growth — as well as past performance, current economic conditions, and future prospects.
- Adequate capital. The final test determines whether a company has adequate capital and is likely to survive in the normal course of business, bearing in mind reasonable fluctuations in the future. In addition to looking at the value of net equity and cash flow, experts consider factors such as asset volatility, debt repayment schedules, and available credit.
Companies generally are considered solvent by solvency experts if they pass all three of these tests.
Courts typically presume that a company is insolvent unless a party to litigation proves otherwise. You can bolster your position with a comprehensive solvency analysis performed by a qualified expert. Contact us for more information about obtaining one.