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Net Asset Liquidation

The process by which a business sells off its net assets and ceases operation thereafter

What is Net Asset Liquidation?

Net asset liquidation or net asset dissolution is the process by which a business sells off its net assets and ceases operation thereafter. Although net assets are given by the excess of a firm’s assets over its liabilities, the revenue generated by the sale of the net assets in the market might be different from the book value of net assets.

A business usually sells off its net assets because it can no longer afford to pay its debts, which is different from a voluntary divestment strategy, which is done to improve operating/financial efficiency.

 

Net Asset Liquidation

 

Types of Asset Liquidation

 

1. Complete liquidation

Complete liquidation is the process by which a business sells off all its net assets and ceases operation. After complete liquidation, the business ceases to exist and is no longer a valid entity. Complete liquidation might be complete voluntary liquidation or complete creditor induced liquidation.

 

2. Partial liquidation

Partial liquidation is the process by which a business sells off part of its net assets and reduces the scope of its operation. After partial liquidation, the business continues to exist as a valid entity albeit with a smaller scale of operation. Partial liquidation might be partial voluntary liquidation or partial creditor induced liquidation.

 

3. Voluntary liquidation

When a business ceases operation of its own volition. The decision for voluntary liquidation may stem from the realization that the business is no longer capable of profitable operations. For instance, at present, a firm that manufactures typewriters may voluntarily liquidate its assets when it realizes that the market for typewriters will soon disappear. Voluntary liquidation may be complete voluntary liquidation or partial voluntary liquidation.

 

4. Creditor-induced liquidation

Creditor induced liquidation happens when the creditors of a business force a business to cease operation and sell off assets. Creditors who have lent money to the business may no longer have confidence in the business’s ability to pay back the loans in the future. As a result, the creditors may attempt to recover the loans by forcing the business to liquidate its assets and cease operation.

For example, the creditors of a typewriter manufacturer may force the firm to liquidate as they no longer have confidence in the firm’s ability to repay them in the future. Creditor induced liquidation may be complete creditor induced liquidation or partial creditor induced liquidation.

 

5. Government-induced liquidation

When the government of a country forces a business to cease operation and sell off assets. It is distinct from a creditor induced liquidation as the government need not have any financial interest in the business. Government-induced liquidations are often justified through non-market arguments. For instance:

  • Environmental argument: A profitable manufacturing business may be asked to liquidate its operations as it generates a lot of pollution.
  • Moral argument: An arms and ammunition manufacturing business may be asked to liquidate its operations as the government believes them to be unethical.

Government-induced liquidations may be a complete government induced liquidation or partial government induced liquidation.

 

Learn more: Download CFI’s Free Liquidation Value Template.

 

Examples of Asset Liquidation

 

Complete Voluntary LiquidationA typewriter  manufacturer sells off all its assets
Complete Creditor Induced LiquidationThe creditors of a typewriter manufacturer force it to sell off all its assets
Complete Government Induced LiquidationThe government forces  a typewriter manufacturer to sell off all its  assets as typewriter production pollutes the environment
Partial Voluntary LiquidationA typewriter  manufacturer sells off all its assets except its keyboard manufacturing subsidiary
Partial Creditor Induced LiquidationThe creditors of a typewriter manufacturer force it to sell off all its assets except its keyboard manufacturing subsidiary
Partial Government Induced LiquidationThe government forces a typewriter manufacturer to sell off half its  assets and use the revenue generated to install pollution filters

 

Additional Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Financial Modeling Divestiture
  • Mergers Acquisitions M&A Process
  • Asset Disposal
  • Investment Banking Manual

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