The Role of the Appraiser in a Bankruptcy Case

<p>The assets of a company are made up of many tangible and intangible properties. In many cases, buyers
of a business outside a bankruptcy do not concern themselves with the value of assets other than for reasons
that are secondary to the acquisition. The buyer of the company is first and foremost measuring the return
on the investment. The question is, "What will this company do for me?" However, in a bankruptcy matter,
the assets usually become an important factor. After a company has failed, the new purchaser of a business
will consider the risk of a restart or turnaround, and part of the measurement of the risk to the buyer's
investment is the asset value. This value may, in a failure, be relied upon for a return of all or a portion of
the money paid to acquire the bankrupt estate.

</p><p>There are many reasons why a buyer may be interested in a business, even one in bankruptcy. Many
acquisitions have been completed in order to remove the acquired company as a competitor. This can
happen in a bankrupt estate. At other times, an intangible such as a patent, trademark or client base may
be important. It is for this reason that the court should have some form of market analysis address these
issues if they are present.

</p><p>There are many types of items that make up the assets of a company. In addition to the intangibles, there
can be real estate and improvements, product lines, machinery and equipment, and inventory. Today, there
are very sophisticated ways of measuring inventory to get a reasonable handle on its value under various
concepts.

</p><p>Choosing an appraiser is not always easy. Simply choosing a name from a bank or accepting the
recommendation of someone can be dangerous. Even if the appraiser is good as a valuer, there are other
important considerations, such as the availability of litigation support from the appraisal firm, the
understanding of value concepts, having an adequate staff, and the ability of the chosen firm to perform a
good audit with good descriptions of the assets.

</p><p>When engaging an appraisal firm, there are questions that should be asked of the firm. It is important
to know the background of the appraiser(s) assigned to a project to be certain that their expertise applies
to the industry in question and to the level of the project to be completed.

</p><p>There are many levels within the general designation of "appraiser," such as trainee appraiser and senior
appraiser. These terms can vary by company, so a user of a firm's services should have the firm define
these terms as they apply to them. It is also possible for an appraiser to be limited in his/her ability in a
particular area. For this reason, it is necessary to know when evaluating an appraiser's qualifications if
he/she is disciplined in a specialized area. An individual who has been practicing the profession of
appraising for 20 years and specializing in an industry, <i>i.e.,</i> medical equipment, will require assistance to
properly perform an appraisal of equipment in an industry such as metalworking, chemical, food
processing, etc.

</p><p>To remain current within the appraisal profession, an appraiser should continue his education. This can
be accomplished by attending and participating in seminars that allow appraisers to hone their skills and
understanding of valuation issues. In addition, associations are extremely important for continuing education.
Becoming a member of appraisal societies gives an appraiser the ability to achieve a senior accreditation,
which lends credibility to the firm or individual who conducts the appraisal.

</p><p>It is also possible to have appraisers at different levels of capability within an appraisal firm, and there
may be an even greater disparity between appraisers within the same valuation society. Naturally, the
societies do their best to have appraisers maintain consistency, value accuracy and fiduciary responsibility
through the practice of the methods and standards of valuation for which the society stands. Adherence to
the Uniform Standards of Professional Appraisal Practice (USPAP) does add consistency.

</p><p>It is, of course, understood that the court should be confident that the appraisal firm retained is one of
high integrity and credibility; further, it should be expected that any errors or omissions made in the report,
discovered at any time, will be corrected as long as there is proper justification supporting those changes.

</p><p>When considering an appraisal firm, there are several areas that should be evaluated. One such area is
the firm's background and its acceptance in the marketplace. When looking at areas such as financial
restructuring, with special emphasis on a bankrupt company, the acceptance of an appraisal firm by lenders
is very important. In many cases, debtor-in-possession (DIP) financing is being considered in which an
asset-based lender would be involved. The appraisal may assist as collateral valuation support for DIP
financing and may also be used as a guide to the court for fairness in all areas in which monetary decisions
must be made.

</p><p>In a multi-disciplined appraisal, there are occasions when different firms become involved for different
disciplines. For example, if real estate and machinery and equipment are combined in one report, having
separate departments in the appraisal firm handling these valuations would enable work within the various
areas (real estate and machinery and equipment) to be completed simultaneously so that the deadlines for
production of the formal report would be met. On the other hand, these different disciplines could be
accomplished separately by two different firms. In this case, there should be cooperation between the firms
so the valuations of items such as bridge cranes are not considered in both reports. It may not be necessary
to contract different companies to perform appraisals within the different disciplines of valuation concepts,
as some firms are able to perform valuations on every category of assets and accomplish them at the same
time. Engaging a single multi-task firm can be less expensive and should avoid the overlaps between
disciplines. It will also provide a consistency in the understanding of valuation concepts.

</p><p>There are three major categories that make up business assets other than intangibles, cash and
receivables:

</p><ul>
<li><i>Machinery and Equipment,</i> sometimes referred to as "personalty" or "fixed assets," are typically
described as items used for product manufacture rather than items considered as a part of real estate or
available for day-to-day sale. This would include such items as machine tools, office furniture and
business machines, vehicles, plant furniture and material-handling equipment.

</li><li><i>Real Property</i> is property that could be commercial, industrial, unimproved, rural or residential. It is
necessary to determine whether certain items should be considered as part of the real estate and
improvements or as equipment. For example, bridge cranes or wall-mounted water fountains might be
considered equipment for purchase allocation, insurance or, in a few cases, remarketing under a removal
concept.

</li><li><i>Inventory,</i> which in the past was valued by many on general assumptions of a residual percentage
applied to cost, is now broken down in detailed fashion in order to derive measurements that can be
applied specifically to produce accurate results.</li></ul>

<p>Sometimes business value can be important to an estate. Business valuations are typically requested
when there is a need to measure the viability of the business, and such valuations can also be used as a
marketing tool. Additional value may be considered for the business over and above the physical assets if
the company could be considered profitable upon restructuring.

</p><p>There are a few occasions in which software, as an asset of a company, can have value. However,
software appraisals can be difficult to analyze due to the various methods of measurement. The worth of
software is the return on an investment as projected by its sale and/or use. Two specific methods of
measurement are the income method and the cost of replacement (adjusted) method; income is typically
used to establish fair market value and reproduction cost for fair market value-in-use. Remarketing of
software is very difficult to predict; thus, valuations are used more to determine market potential, use
viability and allocation in a purchase situation. In bankruptcy, liquidation value is a well-accepted concept.
However, for appraisals of software and of various areas of intangibles, there may be a greater margin of
error in any valuation of that type of asset than in a valuation of machinery and equipment, real estate or
inventory.

</p><p>The use of an appraiser can be more than simply arriving at value. There are times when an appraiser
can be a consultant for such things as locating and describing assets, analyzing marketing techniques,
assisting in negotiations for fees, or for discussion of measurements of "value added" areas. Appraisers who
have also been associated in liquidation or brokerage have some insight, in addition to the value, into the
way to arrive at prices that reflect the valuation. Such things as valuation interpretation can be important,
and an appraiser has usually experienced the various definitions and uses. Remember, there are various
interpretations of value, and the slant of that interpretation is typically influenced by those who have the
most to gain. It is beneficial to have an independent party who can serve the needs without advocacy.

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