What Is a Company Worth When It’s Liquidated?

No matter how much the overall economy is thriving, some businesses will struggle and eventually need to liquidate their assets. Getting the most out of liquidation requires guidance from financial experts who can help owners make informed decisions. Experts can also help potential buyers determine the appropriate price to offer for distressed assets and conduct acquisition due diligence. (Need to know more about valuation basics? Click here.)

Key questions: Whether to liquidate, and how quickly

The ultimate question is: How much is the distressed company worth? Is it worth more as an operating business or as the sum of its liquidated assets? Certain financial trends — such as recurring net losses, declining sales and severely reduced liquidity — may suggest that the business would be more valuable if it were liquidated. Generally, liquidation value is relevant when the company’s historical and expected earnings don’t contribute incremental value beyond its net tangible asset value.

Liquidation can be performed in two ways, and the choice affects how much value can be recovered.

1. Orderly liquidation. In an orderly liquidation, assets are sold piecemeal over a reasonable period of time to maximize proceeds.
2. Forced liquidation. Forced liquidation value assumes assets will be sold quickly, possibly in an auction.

Valuation experts consider timing, bankruptcy laws and judicial mandates when determining the appropriate premise of value. Liquidation value often serves as a “floor” for business value. It also can help owners decide whether to file for Federal Bankruptcy Code Chapter 7 (liquidation) or Chapter 11 (reorganization). In addition, it helps stakeholders evaluate the viability of spin-offs and mergers, out-of-court loan workouts, management buyouts and reorganization plans.

Estimating value

When estimating liquidation value, experts typically start with the balance sheet. The book values of liabilities are generally accurate, but assets may need adjustments for recoverability and current market values. For example, a distressed company may expect to receive 50 cents on the dollar for inventory and 70 cents on the dollar for receivables reported on the balance sheet.

The valuation also must consider the existence of unrecorded items, such as patents, trademarks, customer lists, claims for back taxes, warranties and pending lawsuits. In addition, there will be liquidation expenses, such as lease obligations, severance pay and professional fees. Usually, money is set aside in an escrow account for these expenses before the company distributes liquidation proceeds to creditors and investors.

From the buyers’ side, valuation professionals can help potential purchasers determine their targets’ strategic value — or value based on the specific buyer’s investment requirements and expectations. For example, a buyer may be willing to pay more than liquidation value for a company that provides synergies, economies of scale or expanded market share to its core business.

Other assistance

Beyond valuation matters, financial experts can advise distressed businesses on such issues as negotiating debt restructuring with creditors and coordinating bankruptcy filings. They can provide fairness opinions for management buyouts and third-party acquisitions and help implement reorganization plans. Valuation experts also might work with, or serve as, court-appointed receivers and turnaround consultants.

When creditors file fraudulent conveyance lawsuits, valuation experts can help determine the facts by performing a solvency analysis. The expert’s subsequent solvency opinion determines whether the allegedly fraudulent transfer has left the company unable to service its debt obligations or continue normal business operations.

Need help?

A distressed business often needs an expert who specializes in bankruptcy consulting. When evaluating a valuation professional, assess the expert’s financial expertise and knowledge of bankruptcy law, as well as his or her communication skills. Strong communication is essential when it’s time to negotiate with investors, creditors and other concerned parties.

Weaver can help with transactions from beginning to end, including valuation and due diligence services. Learn more about our Transaction Advisory Services or contact us for a consultation.

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