Liquidation value
Capital MarketsWhat the assets would fetch if the business stopped and was sold off piecemeal, net of wind down costs.
A liquidation analysis marks each asset to what it would realise in a sale, applying recovery rates that fall sharply down the balance sheet: receivables recover most, inventory less, specialised fixed assets least.
Wind down costs are real and routinely forgotten: redundancy payments, adviser fees, lease exit costs, and the cost of running the process. They come straight off the gross proceeds.
The distinction between an orderly liquidation, conducted over months to find proper buyers, and a forced sale, conducted in weeks, is worth several multiples of recovery on some asset classes.
It sets a floor for creditor recoveries in a restructuring, because no class can be forced to accept less than it would have received in a liquidation. That is why the analysis is prepared even when nobody intends to liquidate.
Worked example
Receivables 120 recover 80% giving 96; inventory 100 recovers 50% giving 50; property and equipment 200 recovers 40% giving 80. Gross proceeds are 226.
Wind down costs of 26 for redundancies, advisers and lease exits leave 200 net.
A forced sale over eight weeks rather than an orderly one over nine months might recover only 60% of that on the fixed assets, so the process matters as much as the assets.