Credibility Test: Management Projections vs. Market Evidence

Management Projections1

Credibility Test: Management Projections vs. Market Evidence

In a bankruptcy, financial projections play a significant role in many different aspects of the process. Whether it is for performing a solvency analysis in a fraudulent conveyance case, or developing projections for a company’s reorganization plan, the reliability of financial projections is crucial.  In many cases, the Court’s preference is to rely on management’s projections, as management usually has vast experience within the company.  However, there are instances where projections produced by a company’s management are not reliable.

The Michel-Shaked Group’s Israel Shaked (Managing Director) and Paul Dionne (Manager) published an article in the August 2019 issue of the American Bankruptcy Institute Journal discussing why bankruptcy and other professionals should not religiously accept management’s projections without first testing the reasonableness of the projections.

In the article, Dr. Shaked and Mr. Dionne discuss several analyses that can be performed to assess the reasonableness of management projections.  These analyses include, but are not limited to, an analysis of (1) the company’s historical performance vs. management projections; (2) the company’s historical performance compared to its peer group; and (3) management’s ability to accurately forecast in the past.

Utilizing experience from valuation work performed on a recent fraudulent conveyance case for a retail bankruptcy, the authors explain how, in this particular instance, they found management’s projections of the company to be unreliable.  This determination was significant, and ultimately influenced a favorable settlement for the unsecured creditors of the company.

A full version of this article can be seen here.