Distressed Companies: An Exploratory Study of Considerations, Approaches and Methods Of Valuation

Abstract

A company is said to be in distress when the company is unable to meet, or has difficulty paying off, its financial obligations to its creditors, typically due to high fixed costs, illiquid assets, or revenues being sensitive to economic downturns. While the dominant valuation methods have proven to be very reliable for healthy companies with stable future growth prospects, they struggle to yield accurate results for companies that face extreme volatility and uncertainty, such as firms in decline and distress. Distressed firm valuation is a complex topic in which many traditional assumptions and methodologies of value measurement do not work. Valuation in general is a combination of science and art, more so in the case of distressed companies. Hence, a right mix of assumptions, framework, approach, and methodology should be judiciously used to arrive at the appropriate valuation, which balances the theoretical and practical aspects