The first step in the D.O.V. method is to determine what, if any, debt currently encumbers the asset. Is the individual asset affected by a bank loan or IRS lien? Is the company that owns the asset affected by an overriding lien or debt? It is critical to verify the debt in as much detail as possible, and to ensure that the seller has provided accurate information about the amount and number of debts affecting the asset to be sold. Neglecting this step could mean that a prior creditor with superior rights to the asset may be able to make claims against the purchaser in the future.
As with verifying debt, it is relatively easy to establish ownership when the assets are real property or equipment: real property will have county records, while equipment and personal property can be searched by titles and tax records and can be additionally verified by bills of sale from the seller.
A business entity can be searched by lien and tax records, just as for personal property. It is also important to check on corporate filings made by the entity, and the seller should certify that the entity is in good standing.
In determining the value of a distressed asset, it is important to remember that value is not an objective quality or measure, but is only ever equal to what someone is willing to pay. It is therefore easiest to establish the value of an asset for which there is a market. For example, it is fairly straightforward to determine the current values of both real estate and personal property by examining such information as recent sales records, city and state codes, and the comparative prices listed by companies or websites selling comparable items.
Private companies, however, do not have an easily determined market, so it is necessary to use an alternative form of valuation. In most cases concerning equity in a company, the income stream method is used. This term refers to the process of measuring the value of an asset outside of a pre-existing market by examining the income generated or available from that asset. This method allows a prospective buyer to calculate the anticipated profit of the asset over the length of its foreseeable lifespan; when that amount is discounted by the time value of money, what results is the net present value of the asset, which takes into account not just the asset’s income, but the cost of holding the asset over time. Knowing the net present value of a distressed asset will greatly help purchasers decide whether the asset is likely to be a useful investment in the long term.