Break-Up Analysis: A Method to Regain Trust in Business Transactions

The financial crisis resulted in a loss of trust; not only within the investment or banking sector, but in general between creditors and debtors, because many organizations faced insolvency. Such a financial situation can even result in a company’s bankruptcy. Therefore it is necessary to get a realistic understanding of the solvency or the possible insolvency of a company. The support of a decision on a debtor’s creditability is not yet sufficiently provided by the most prominent method (Altman’s Z’’-score). The paper presents a procedure called Break-Up Analysis (BUA). It helps to decide on the solvency of a company. The comparison of the BUA to Altman’s Z’’-score shows an improvement of the identification of solvent and insolvent companies by 22 %. The BUA enables herewith to regain trust in business transaction by not identifying only the insolvent companies but the solvent ones as well.