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Liquidation vs. going concern: Making the best choice in today’s economy

April 18, 2013

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Business owners everywhere have had a tough go of things lately. They’ve seen profits fade and costs skyrocket. And even though Congress passed some tax laws favorable to businesses earlier this year, for many companies, it was too little too late.

If your business is between a rock and a hard place, you may be considering liquidation. But be careful before proceeding — you could end up in an even worse situation.

When it’s time to sell

Deciding to sell your company probably won’t be easy. You’ve invested significant time and emotional energy in your business. But once you determine that selling is your best option, begin the process by making a hard-line assessment.

First, find out what your business is worth. Bring in a professional valuator or appraiser to determine the appropriate premise of value at the beginning of the engagement. Common premises of value include: going concern, liquidation-orderly, and liquidation-forced.

The valuation should give you a basis for negotiating the sale price and terms with potential buyers. The appraiser will review your financial statements and determine liquidation values for assets such as real estate and equipment. He or she also can assess the value of your sales volume and determine whether it might be attractive to another company. Your intangible assets — people, knowledge and intellectual property such as recognized brands, copyrights, trademarks, and long-term contracts — can be just as important as tangible property. Values placed on intangible property will likely be scrutinized closely by potential buyers.

Once you understand your company’s market position, financial status, and strengths and weaknesses, you’ll have some idea of what you can expect from a sale. However, keep in mind that other factors, such as the current health of the merger and acquisitions market, will also affect your selling price. Advisors experienced in selling financially troubled companies can help you improve your competitive position and your final sales price. They’re likely to know of buyers interested in the kind of opportunity your company offers.

Understanding liquidation value

Bankruptcies span many industries these days. Whatever the industry, most appraisals focus on a business’s going-concern value. That is, what’s the value of a business enterprise that’s expected to continue to operate into the future? For distressed businesses contemplating bankruptcy, liquidation value is another important benchmark.

The International Glossary of Business Valuation Terms lists two types of liquidation value. In an orderly liquidation, assets are sold piecemeal over a reasonable period of time to maximize proceeds. Alternatively, forced liquidation value assumes assets will be sold as quickly as possible, possibly via auction.

Timing, bankruptcy laws and judicial mandates help determine the appropriate premise of value. Business valuators are familiar with both going-concern and liquidation premises, making them invaluable advisors throughout the bankruptcy process.

Start with the balance sheet

A valuation can help managers decide whether to file for Chapter 7 (reorganization) or Chapter 11 (liquidation). Further, it can help stakeholders evaluate the viability of purchase offers, management buyouts and reorganization plans.

Expert analysis starts with the company’s balance sheet. The book values of liabilities are generally accurate, but assets may require adjustment to estimate recoverability and current market values. Valuators also consider the existence of unrecorded items, such as patents, trademarks, customer lists, IRS claims, warranties and pending lawsuits.

If a company decides to liquidate, the valuator must factor in liquidation expenses, such as lease obligations, severance pay and professional fees. Typically, money is set aside in an escrow account for these incidentals before the company distributes liquidation proceeds to creditors and investors.

Of course, liquidation analyses are just the tip of the iceberg. Valuators can also advise distressed businesses on myriad issues such as devising and implementing reorganization plans, projecting expected cash flows and estimating going-concern values for reorganization alternatives. They can further negotiate debt restructuring with creditors and coordinate bankruptcy filings, among other things.

Work with experts

Closing down a business can be difficult for the company’s owners, employees and shareholders. But bringing in a qualified valuator early on can help ensure a smooth transition.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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