How to calculate orderly liquidation value?
Definition
When an appraisal of a business’s tangible assets like equipment is carried out, the business owner would like to find out How to calculate the orderly liquidation value (abbreviated as OLV) of these assets to provide the information to investors, 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 very similar to book value calculation with a small difference in assets value estimation. 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 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 can make their offers. The seller will also control the process of the sale of the assets.
How to calculate an orderly liquidation value?
Orderly liquidation value can be calculated when the calculator in the first step prepares the balance sheet of the company and then find the market value of tangible assets (Fixed and current assets value). Then, from the total liquidation value of all assets, the calculator needs to subtract all liabilities. Last, Calculate Net Liquidation Value and find Orderly Liquidation Value.
In this video below we can see how to calculate orderly liquidation value step by step:
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 an appraiser’s 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 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 that the buyers can use to justify their asset’s purchase price. 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 forced to make the sale. The seller gets a fair value because both the buyer and seller are not forced to quickly finalize the deal; they are free to refuse the deal. Unlike any liquidation, where the seller has to sell the assets within a specified time period, for 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 to 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.
