Valuing a distressed company
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
6 min read · updated October 7, 2026
In an ordinary deal, valuation sets the price. In a restructuring it does something bigger: it decides who owns the company afterwards. The value of the reorganized business is split down the capital structure in order of priority, so where that value lands determines which class is the fulcrum and takes the new equity, and which classes get nothing. That is why valuation is the battlefield of most contested restructurings.
Why everyone argues for a different number
Take a company with $500M of first-lien debt, $300M of second-lien debt and $100M of unsecured bonds. The parties hire competing valuation experts.
| At $600M | At $900M | |
|---|---|---|
| First lien ($500M) | 100% | 100% |
| Second lien ($300M) | 33%, takes the equity | 100% |
| Unsecured ($100M) | 0% | 100% |
| Old equity | 0% | 0% |
At $600M, the second lien is the fulcrum: it recovers $100M of its $300M and receives most of the new equity of a company worth $600M. The unsecured bonds are out of the money. At $900M, the second lien is paid in full and the unsecured bonds are in the money too, so they must be paid in full or get a share of the equity.
So the incentives are predictable. The fulcrum class argues for a low value: the lower the value, the more of the equity it takes and the more classes below it are shown to be worthless. Junior creditors and old equity argue for a high value, because a higher value pulls them into the money. The company sits in between: its value has to support the plan being feasible, and in a cram-down fight the court decides whose number to believe.
A low valuation is not pessimism; it is a strategy. If the fulcrum creditors convince the court the company is worth $600M, they own it, and if it later turns out to be worth $900M, they keep the gain. That is why distressed investors buy the fulcrum and why the valuation fight can be the most important part of the case.
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Frequently asked
- How does valuation change for a distressed company?
- The tools stay the same: comparable companies, precedent transactions and a DCF. The inputs change. Start by normalizing EBITDA, because the recent numbers carry one-off costs and business that is gone for good. Price the whole business on enterprise value multiples, since the equity is close to worthless. Take multiples from the lower part of the range, and build the DCF on management's plan in several scenarios, with the capital structure the company will have once it emerges. A liquidation analysis then sets the floor.
- Why do creditors argue about the valuation in a restructuring?
- Because the value decides who owns the company. The fulcrum class argues for a low value, so that it takes the new equity and the classes below it are shown to be out of the money. Junior creditors and old equity argue for a high value, so that they are in the money and must be given a recovery.
- What is a liquidation analysis used for?
- It estimates what creditors would get if the company were shut down and its assets sold. It sets the floor for the plan: under the best interests test, every creditor who votes no must get at least its liquidation recovery. It is also the worst case that pushes parties toward a deal.
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