Total Liquidation: Everything You Need to Know
Total liquidation is the process that happens when a business ends and is dissolved.3 min read
2. Liquidation Preference and Venture Capital Firms
3. The Various Values: Market, Book, Liquidation, and Salvage
Total liquidation is the process that happens when a business ends and is dissolved. All of the company's assets are distributed to lenders, creditors, shareholders, etc. based on the seniority of their claims.
Before liquidating your business assets, value those assets. In general, the liquidation of a small business's assets are 20 percent lower than retail value. You should consult with a qualified appraiser if you need help pricing your assets. If the liquidation value covers or nearly covers your liabilities, you may be able to negotiate with your creditors to settle any outstanding debts.
Assessing Liquidation Value
Liquidation value is the total worth of a business's physical assets if it were to go out of business or if it actually goes out of business. The value is determined by the following:
- Real estate.
A business's liquidation value doesn't include intangible assets.
Following are the four levels of valuation:
- Book value.
- Market value.
- Liquidation value.
- Salvage value.
Each of these levels gives analysts and accountants a way to classify the assets' aggregate value.
For people who work with bankruptcies, liquidation value is particularly important. This value is typically lower than book value but higher than salvage value. Assets continue having value, but due to the limited time frame, they are sold at a loss to book value.
Intangible assets include the following:
- Intellectual property.
- A business's goodwill.
- Brand recognition.
When companies are sold instead of liquidated, both intangible assets and liquidation value go into determining the company's going-concern value. Value investors consider the difference between a business's market capitalization and its going-concern value to see if its stock is a good buy.
Liquidation Preference and Venture Capital Firms
Liquidation preference determines the order of payouts in a corporate liquidation. Venture capital contracts frequently use liquidation preference to specify which investors are paid first and how much they receive when a business is sold, liquidated, or goes bankrupt.
The business's liquidator analyzes the company's secured and unsecured loans. The liquidator also looks at the definition of share capital, including common and preferred stock, to determine the liquidation preference. He or she can then rank all creditors and shareholders to properly distribute funds.
Specific liquidation preference is popular when a venture capital firm invests in a startup. Investors typically require liquidation preference over other shareholders as a condition of their investment capital. This offers venture capitalists some protection from losing money, since they'll get back their initial investments before other parties.
In a venture capital contract, the sale of the company is usually considered to be a liquidation event. If the business is sold at a profit, this type of preference puts venture capitalists first in line to claim a portion of the profits. They're usually repaid before the following individuals:
- Original company owners.
- Holders of common stock.
In many instances, the venture capital firm also participates as a common shareholder.
The Various Values: Market, Book, Liquidation, and Salvage
Market value is usually the highest. However, it might be lower than book value if the assets' value has gone down as a result of demand.
The book value is an asset's value outlined on a balance sheet, which lists various assets at their historical cost. Therefore, the assets' value might be lower or higher than market prices. When prices are rising in the environment, the book value is lower than market value.
The liquidation value is the value placed on an asset after it's been sold or liquidated, presumably at a loss. Lastly, salvage value may also be known as scrap value. It's the estimated worth of an asset once it reaches the end of its usefulness.
You can arrive at book value by subtracting the total accumulated depreciation from the total acquisition cost. When liquidation occurs, an asset may or may not still have some use. Therefore, it might bring in more than salvage value.
When companies go out of business, there's often a variety of assets for sale. Naturally, business owners try to get as much as they can for these assets, but asset value depends on a number of factors, including the current economic climate.
If you need help with a total liquidation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.