Net asset liquidation or net asset dissolution is the process by which a business sells off its assets and ceases operations thereafter. Net assets are the excess value of a firm’s assets over its liabilities. However, the revenue generated by the sale of the net assets in the market might be different from their recorded book value.
A business usually sells off its assets because it can no longer afford to pay its debts. This is different from a voluntary divestment strategy, which is done to improve operating/financial efficiency.
Types of Asset Liquidation
Here are the different types of liquidating assets:
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 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
Voluntary liquidation occurs 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, a firm that manufactures typewriters may have chosen to voluntarily liquidate its assets upon realizing that the advent of personal computers meant that the market for typewriters would 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 its assets. Creditors who have lent money to the business may no longer have confidence in the business’s ability to pay back the loans. As a result, when the business fails to make scheduled loan payments, the creditors may attempt to recover the loans by forcing the business to liquidate its assets.
Creditor induced liquidation may be complete creditor induced liquidation or partial creditor induced liquidation.
5. Government induced liquidation
Government induced liquidation 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 because it generates a lot of pollution.
Moral argument: An arms and ammunition manufacturing business may be asked to liquidate its operations because the government believes them to be unethical.
Government induced liquidations may also be complete or partial.
CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:
CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:
Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.
A well rounded financial analyst possesses all of the above skills!
Additional Questions & Answers
CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.
In order to become a great financial analyst, here are some more questions and answers for you to discover:
CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:
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