Every so often, the question of whether a valuation can have as its conclusion of value a negative equity amount comes up. Accountants are all familiar with the concept of negative equity on a balance sheet. However, conclusions of value are not GAAP balance sheets and do not represent, for example, fair market value. With that in mind, the answer is very simply that, yes, one might arrive at a conclusion of value that is negative. But there is a caveat. While, in many situations, a negative value might be appropriate, marital dissolution/divorce cases require a note of caution. A divorce case requires that the “marital estate,” that is, all of the assets that belong to the marital estate less all of the liabilities of the marital estate, must be divided, according to the appropriate state law, between the two parties. In determining the value of a marital business, it might be the case that the business might have a negative value as a result of debt that exceeds the value of the assets of the business. In many cases of debt in a small business, the business owners, often the parties to the divorce, guarantee the debt. If it is determined that the guarantors are capable of repaying the debt and that the guarantee is enforceable, then the conclusion of value would be adjusted to take the debt guarantee into account. That could result in the negative value disappearing. If that occurs, then the marital estate should be adjusted to include the guarantee amounts as separate liabilities of the marital estate. However, the liabilities cannot be included both in the business and as a separate liability to avoid double counting. In the case of a bankruptcy, a negative value often occurs and the determination by the valuation analyst is that the business is insolvent. However, there could also be guarantors to some or all of the debt of a business that has filed for bankruptcy. If the guarantees are valid and enforceable, they should be recognized as offsetting assets in valuing the business, which could mean that it is not insolvent and, under the balance sheet test, would not be bankrupt. Another situation that arises relating to negative value conclusions is the determination of a fraudulent transfer (conveyance).1 Under a constructive fraud, a transfer can be fraudulent if the debtor received less than reasonably equivalent value, and the debtor was insolvent or became insolvent because of the transfer. To prove a fraudulent transfer, it is often necessary for a valuation professional to perform a valuation as of each of the dates of transfers of assets. Only if the valuation conclusion as of each transfer date shows that the debtor was insolvent will the transfer be considered a fraudulent transfer. The balance sheet test, most often used in this situation, requires a determination by a valuation professional that the fair value of the liabilities exceeds the fair value of the assets. The norm of accepting a negative conclusion of value is more prevalent than not accepting it. As is often the case in valuation issues, the facts and circumstances of the case at hand is a most important element to consider. BVResearch Pro subscribers can look forward to the author’s April “Tales From the Trenches” post, which will examine a real case in which fraudulent transfer valuations played a key role in achieving a successful outcome. 1 A fraudulent transfer (often called a fraudulent conveyance) is a transfer of property or assets made with the intent to hinder, delay, or defraud creditors. As a BVResearch Pro subscriber, you don’t just read the research, you interact with it. Use RADA, BVR's intelligent Research and Data Assistant, to get AI-enhanced summaries and analysis of complex topics or to search our entire research archive for specific answers in seconds. Not a subscriber? Learn more here.

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