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Orderly Liquidation Value (OLV) is a significant financial concept, particularly in asset valuation and liquidation. It refers to the estimated amount of money that could be received from selling an asset or a group of assets over a reasonable period under current market conditions.
This estimation is done under the assumption of an orderly sale, meaning the assets are sold in a manner where their value is maximized, not through a forced or quick sale. OLV is often used in bankruptcy proceedings and financial reporting and by lenders to assess the value of collateral. It differs from Forced Liquidation Value (FLV), which estimates the value when assets must be sold quickly, often resulting in a lower value.
What is the Orderly liquidation value?
In finance, orderly Liquidation Value or OLV represents the monetary value given to an asset under the assumption that the asset must be sold because the seller needs to sell it. Liquidation value estimates the asset owner’s total amount would get if the assets were liquidated in an auction.
In theory, “Orderly Liquidation Value (OLV) is defined as an opinion of the gross amount, expressed in terms of money, that typically could be realized from a liquidation sale, given a reasonable period to find a purchaser (or purchasers), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date.
When an appraisal of a business’s tangible assets, like equipment, is carried out, the business owner would like to determine how to calculate these assets’ orderly liquidation value (OLV) to provide the information to investors, lenders, lenders, and other stakeholders.
Liquidation value estimates the asset owner’s total amount would get if the assets were liquidated in an auction. When estimators calculate orderly liquidation value, it is similar to book value calculation with a slight difference in asset value estimation.
The seller would not make any repairs or improvements in the assets; he would sell them in their current condition in liquidation to the buyer. The prefix “orderly” for the liquidation indicates that during the liquidation of the assets, the seller will be allowed a reasonable amount of time to identify almost all potential buyers of these assets and inform them of the liquidation to make their offers. The seller will also control the process of the sale of the assets.
How do you calculate an orderly liquidation value?
Orderly liquidation value can be calculated when the calculator, in the first step, prepares the company’s balance sheet and then finds the market value of tangible assets (Fixed and current assets value). Then, the calculator needs to subtract all liabilities from the total liquidation value of all assets. Last, Calculate the Net Liquidation Value and find the Orderly Liquidation Value.
OLV example :
The company has a market capitalization of $100 million.
The company has liabilities: $30 million
The book value is $80 million.
The company’s value in the auction market: $70 million
Now let us make the calculation:
Orderly Liquidation Value OLV = Auction market value – liabilities = $70-$30= $40 million
Let us in detail show the OLV calculation example in detail:
- The company’s market capitalization is $100 million. This figure represents the total value of the company’s shares in the stock market and reflects the public’s perception of its worth.
- The company has liabilities amounting to $30 million. These liabilities could include debts, loans, or other financial obligations the company must settle.
- The book value of the company is stated to be $80 million. Book value is calculated as the difference between a company’s assets and liabilities. It represents the net value of the company’s assets.
- The company’s value is estimated to be $70 million in the auction market. The expected price could be obtained if the company’s assets were sold in an orderly auction market.
- To calculate the Orderly Liquidation Value (OLV), you subtract the liabilities from the auction market value: $70 million (auction market value) – $30 million (liabilities) = $40 million. This $40 million represents the OLV, or the net amount expected to be received from an orderly sale of the company’s assets after settling its liabilities.
In this video below, we can see how to calculate orderly liquidation value step by step:
The orderly liquidation of assets differs from a forced liquidation, where the assets are offered to the first available buyer willing to purchase the assets. The seller also does not have any control over the process of selling the assets in a forced liquidation. Usually, the bank that has lent money to the seller and has taken over the assets due to non-payment of the loan will control the sale of the assets.
What is the net liquidation value?
Net liquidation value represents the current value of all assets in your portfolio if you close every position at the current market price. If you convert each asset from your portfolio into cash based on current market prices, you will get net liquidation value as the net value of a company’s physical assets.
OLV Explanation
Most company buyers will hire appraiser services who will estimate the value of the tangible assets that the business has acquired. This asset value assessment will prove that the purchase price was justified since the purchase had sufficient tangible assets. This will also reduce the amount paid for intangible assets like goodwill in the purchase. Appraisers of assets will usually provide two values of the tangible assets that are purchased, which are :
– the fair value of the assets
– the OLV, along with the estimated life for which the asset will be useful
The appraiser will provide a fair value that the buyers can use to justify their asset’s purchase price. The asset’s fair value can also be used for getting finance while taking loans. Typically, the fair value of assets is higher than the OLV since the seller is not forced to make the sale. The seller gets a fair value because neither the buyer nor seller is forced to finalize the deal quickly; they are free to refuse it. Unlike any liquidation, where the seller has to sell the assets within a specified period, the seller is not obliged to sell; he can wait for any period to get the required price. To determine the fair value, it is also assumed that the seller is allowed sufficient time to do market research to find all the buyers interested in purchasing the listed assets.
Contacting more potential buyers helps the seller get the best possible price.
Conclsuion
The Orderly Liquidation Value (OLV) is a crucial financial metric for understanding the potential net value obtainable from selling a company’s assets in an orderly, non-distressed manner. In the given example, where a company with a market capitalization of $100 million and a book value of $80 million has liabilities of $30 million, the OLV is calculated to be $40 million.
This figure represents the realistic value that could be expected if the company’s assets were liquidated in an auction market after settling its liabilities. OLV is particularly important for lenders, investors, and company management as it provides a more conservative estimate of asset value than market capitalization or book value, particularly when quick liquidation is not required. Understanding OLV helps make informed decisions regarding asset valuation, risk assessment, and financial planning.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
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