Liquidation Analysis in Houston
An individual or business’s assets can be valued in many ways. One way is to perform liquidation analysis in order to determine those assets’ liquidation value.
There are instances where liquidation value is relevant for a business. Specifically, when the company needs to quickly offload assets, or when a company takes on more assets than it needs following a major transaction – such as a merger and acquisition.
A reputable forensic accountant can provide liquidation analysis services when needed, giving their clients a clear picture of how their assets would fare on the market.
What is Liquidation Value?
When business assets are valued, they may be assessed according to their market value, book value, liquidation value or salvage value. Here are the differences:
- Market value – Market value represents what the company would be valued on the financial markets, which is determined using its stock price. The company’s assets are included in its market value, though it’s only one valuation factor among many others.
- Book value – A company’s book value is, in a nutshell, the difference between the value of its total assets and the value of its total liabilities. In other words, if the company’s assets were sold off at their listed value, the book value is the amount of money that would be left to pay shareholders once its liabilities were resolved.
A company’s book value also includes its intangible assets – assets like goodwill that add to the company’s overall value but cannot be easily quantified. - Liquidation value – A company’s liquidation value describes what could be recovered on the market if all existing assets were to be immediately sold. This involves assessing the fair market value and assigning an expected recovery rate (expressed as a percentage) to each asset. The asset’s recovery rate describes how much of the asset’s fair market value (FMV) the company would likely recapture given market conditions and timelines.
The asset’s FMV is multiplied by its recovery rate to attain its liquidation value. This is tabulated for each asset and added together, then total liabilities are subtracted to attain the company’s final liquidation value. - Salvage value – Salvage value refers to the money the assets would be worth if scrapped – essentially just the material value of those assets once they are at the end of their lifespan. As such, an asset’s salvage value is lower than its liquidation or book value.
- Market value – Market value represents what the company would be valued on the financial markets, which is determined using its stock price. The company’s assets are included in its market value, though it’s only one valuation factor among many others.
How do Forensic Accountants Perform Liquidation Analysis?
When accountants perform liquidation analysis, they consider the value of the following assets:
- Real estate
- Equipment and machinery
- Vehicles
- Furniture
- Inventory
Intangible assets like goodwill, reputation or brand power are not factored into a company’s liquidation value. They may be factored into a company’s market value if the business is up for sale, but intangible assets cannot be reliably capitalized on when liquidating a company.
During liquidation analysis, the accountant will investigate the FMV of each asset using market comparisons, which can be attained by looking at previous sale data, auctions or vendor listings. The accountant will then determine how much of this FMV the company is likely to recover should it attempt to sell the asset within a given timeframe. The shorter the timeline, the more difficult it will be to recoup a significant portion of the item’s value.
Four Reasons to Consider Due Diligence Services
Liquidation analysis gives business owners an idea of what their company’s tangible assets are worth, which is valuable information that’s necessary prior to some high-impact decisions. In general, business owners seek liquidation analysis services when their company is distressed. Some examples of this include:
- Bankruptcy – Liquidation analysis provides essential valuation data prior to filing for bankruptcy. Courts order a liquidation analysis before approving a restructuring plan for any organization filing for Chapter 11 bankruptcy. The goal is to determine which approach is more likely to make creditors whole – either restructuring the organization or liquidating its assets and paying back creditors that way.
- Mergers and acquisitions – During a merger and acquisition, a liquidation analysis may be requested in order to perform due diligence and to determine what to do with redundant assets. It is common for acquiring businesses to liquidate assets they have no use for when merging with another company, and liquidation analysis ensures an optimal return when doing so.
Liquidation Analysis Can Provide a Clear Valuation Picture to Business Owners
If your business is about to enter a new phase of existence through acquiring new assets or being acquired, for example, then valuing its assets is critical to making sound decisions during the process. Liquidation analysis is part of the valuation picture and can help owners determine which assets to prioritize for sale or for other reasons.
A reputable forensic accountant can provide this critical insight prior to a major transaction, ensuring you have the information you need to move forward with liquidation.