How to calculate orderly liquidation value ?
Definition
When an appraisal of the tangible assets of a business like equipment is carried out,the business owner would like to find out How to calculate orderly liquidation value (abbreviated as OLV) of these assets, so that he can provide the information to investors, lenders and other stake holders.Liquidation value is an estimate of the total amount the asset owner would get if the assets were liquidated in an auction. The seller would not make any repairs or improvements in the assets, he would sell them in their current condition in the liquidation to the buyer. The prefix “orderly” for the liquidation indicates that during the process of liquidation of the assets, the seller will be allowed a reasonable amount of time, so that he can identify almost all potential buyers of these assets, and inform them of the liquidation, so that they can make their offers. The seller will also control the process of sale of the assets.
The orderly liquidation of assets, is different from a forced liquidation where the assets are offered to the first available buyer who is 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 which 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.
Explanation
Most company buyers will hire the services of an appraiser who will estimate the value of the tangible assets which the business has acquired. This assessment of the asset value will help to prove that the purchase price was justified since there were sufficient tangible assets included in the purchase. 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 which 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 which the buyers can use to justify their purchase price of the asset. The fair value of the asset can and 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 being forced to make the sale. The seller gets a fair value because both the buyer and seller are not forced to finalize the deal quickly, they are free to refuse the deal. Unlike any kind of liquidation, where the seller has to sell the assets within a specified time period, for a fair value, the seller is not obliged to sell, he can wait for any period of time, to get the price required. For determining the fair value, it is also assumed that the seller is allowed sufficient time so that he can do the market research to find all the buyers who would be interested in purchasing the assets listed for sale.
Contacting more potential buyers helps the seller get the best possible price.
