Adjusting long term debt in valuation

fair-market-value-240px-482767209When we value a company, we need to adjust the balance sheet to Fair Market Value. I normally see the assets being adjusted to Fair Market Value but normally do not see the long-term debt being adjusted to its Fair Market Value. The long-term debt should be adjusted to its net present value using the current market rate of interest, not the interest rate provided for in the loan agreement.

If the long-term debt is not adjusted to its Fair Market Value, the Adjusted Net Asset value will be incorrect. This poses at least a couple of problems. First, the Adjusted Net Assets will not be stated correctly. The market interest rate will determine if the Adjusted Net Assets are over or under stated. Second, because the long-term debt was not adjusted to its Fair Market Value, there may be an argument that you did not follow the development standards and this may expose you to additional liability. Third, by not adjusting the long-term debt to its Fair Market Value, you may inadvertently have selected a unsupportable bias position for your client. We all know what an attorney will do with this.

Also, by not adjusting the long-term debt to its Fair Market Value, any other calculation that relies on the Adjusted Net Asset value will be incorrect. Valuators should take the time to adjust each long-term note payable to its Fair Market Value using the market rate of interest.

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