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The Difference Between Orderly Liquidation, Forced Liquidation, and Fair Market Values

June 11, 2014

Liquidation value is the estimated amount of money a company’s assets could quickly be sold for if the company went out of business. In a growing company that shows profit, the liquidation value would be much less than the company’s share price. In an unprofitable or shrinking industry, the liquidation value would likely exceed the share price. Though not always the case, if the liquidation value exceeds the share price, the company will go out of business.

An orderly liquidation value is based on the idea that a company can afford to sell off its assets to the highest bidder. It assumes an orderly sale process in which the seller can take a reasonable amount of time to sell each asset in its appropriate season, and through channels of sale and distribution that fetch the highest reasonable price.

However, the circumstances are different in the case of forced liquidation value. Forced liquidation value assumes that a business owner is being forced to sell his machinery, equipment, and other assets. Forced liquidation value implies a reduced sales value because buyers are taking advantage of a seller who is being compelled to sell. The forced liquidation value of a company’s assets will always be lower than the fair market value.

Fair market value is based on the best price you’d receive for your machinery or piece of equipment if it were sold in the open market. When an appraiser determines fair market value, he or she operates under a set of assumptions: the market is open to and accessible by a large number of buyers and sellers, all rights and benefits attributable to the asset are included in the sale, and neither the buyer nor the seller is being forced into the transaction and both are knowledgeable about the asset in question.

Other factors can also be taken into consideration when determining fair market value, such as sales of comparable assets, cost to replace the asset, and expert opinions. Because fair market value depends on the availability of sales data for comparable assets and can be affected by place and time of the sale, the value tends to be subjective. This is why it’s so important to rely on an experienced, certified appraiser who understands how to compile and analyze appropriate data so that you can be confident that the asset values you are given are reliable.

The NEBB Institute endorses and strives to observe the highest standards of professional ethics to preserve the public trust inherent in the professional appraisal practice. The Institute provides initial and monthly comprehensive education, ongoing support, and a dynamic international network, and certifies professionals in the art of machinery/equipment appraisal and brokerage.

By:NEBB Institute

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