A Quantitative Analysis of Valuation Disclosure in Published Business Rescue Plans

Abstract

Purpose: Given the importance of valuations in business rescue and the vague guidance provided by the Companies Act 71 of 2008, the study analyses valuation-related disclosure in published business rescue plans (PPs) in South Africa (SA). The main objective of the paper, in addition to being exploratory of actual practices, was to highlight a need for improvements in the Companies Act legislation to support more consistent practices.
Design: A quantitative content analysis was done of 55 PPs between 2013 and 2018, using descriptive content analysis and inferential statistical techniques.
Findings: Primarily, the list of material assets were disclosed at accounting book values in PPs, and liquidation values were mostly independently determined. PPs described various risks relating to the implementation of the PP; however, the PPs mostly lacked calculations of how the risk will affect the business rescue value. On average, the business rescue value exceeded the liquidation value with 36.4 cents for concurrent creditors compared to 33.7 and 21.2 cents for preferent and secured creditors, respectively. Notably, when the PP included a sale of the business, offers received were, on average, 2.5 times the liquidation value and represented 57% of the book value of the company’s assets at the time.
Practical implications: The study suggests improvements to the Companies Act to support more consistent valuation-related disclosure in PPs in SA, in particular, the disclosure of the valuation basis used, the average business rescue premium and offers relative to asset values. Such disclosure would provide evidence to investors on the sound potential of investing in a financially distressed company in SA but, at the same time, set realistic sale expectations for both creditors, BRPs and shareholders.
Originality: In view of limited empirical evidence on business rescue prices, the article presents the results of original research in this field.