How to Solve Business Valuation Matters When A Company is Liquidating

Business valuation matters in Houston

Are you liquidating your company and need a business valuation in Houston? Wiley Financial is a leading business valuation company that helps companies under liquidation determine their fair market value. This article provides solutions to challenges that arise when evaluating a liquidating company.

What is company liquidation?

Liquidation is the formal process of ending a company and distributing the assets among the claimants. The company’s directors or a third party can initiate the process. It occurs when the company cannot pay its obligations on time.

During the ending process, the company will use the remaining assets to pay its shareholders and creditors. After liquidation, the company will cease to exist with its name removed from the Companies House register.

If the company had outstanding unsecured debts, they would be written off. Liquidation can also mean selling a poor-performing asset at a lower price than the company desires.

Distribution of assets

During liquidation, a company’s assets are distributed based on the priority of the parties’ claims. The U.S. Department of Justice appoints a trustee who oversees the process. The priority goes to creditors with collateral on loans to the company.

Due to the short timeframe, they will sell the collateral, often at a throwaway price. If the earnings are insufficient, they will use the company’s remaining liquid assets to recoup the balance.

Second in line are unsecured creditors. They may include the government, employees, and bondholders. Finally, shareholders will receive the remaining assets, which is a rarity.

Types of liquidation

They are three types of liquidation for companies in Houston. They include member’s voluntary liquidation, creditor’s voluntary liquidation, and compulsory liquidation. The liquidation type is dependent on the company’s financial situation.

If a company is solvent, it can repay its debts and other liabilities within 12 months. An insolvent company cannot repay its liabilities. Therefore, based on the financial situation, a company can use either of the following liquidation procedures.

Decision function

The decision function shows the decision value of a company. It focuses on the business value calculation purpose, providing the basis for rational decisions. In short, it presents the limit of the concession willingness of a party in a conflict situation.

It represents the conditions relevant to conflict resolution (conflict-resolution-relevant facts). It also provides acceptable cases in case of an agreement. The decision function is the primary value for all the functions.

Member’s voluntary liquidation

It is the most effective way of ending a solvent company. It allows the company’s directors to voluntarily wind down a company, often due to little use of the company, especially when starting a new one. They will access the company’s retained profits at a low cost. It is widely used since the retained profits are taxed as Capital Gains rather than income. Besides, the directors can further apply for business asset disposal relief, reducing the tax rate.

Creditor’s voluntary liquidation

If a company in Houston is insolvent, it cannot use the member’s voluntary liquidation; instead, it uses the creditor’s voluntary liquidation (CVL). While a voluntary method, company directors use it as the last resort when options are few. If the company decides on CVL, it is best to seek professional advice before debts escalate.

The company will first inform the shareholders before appointing a professional insolvency practitioner. Once selected, they take charge of the process, ensuring the company winds down legally. The firm’s assets will be sold, with the funds extracted used to repay the company’s creditors.

The company’s shareholders will receive the remaining amount, if any. The director will pay the insolvency practitioner’s fee. And if there’s no money left, they will have to pay from their pockets.

Compulsory liquidation

Unlike the previous liquidation methods, this process is involuntary. The courts often initiate it upon the request of a company’s creditor or creditors. The judge will determine whether compulsory liquidation is necessary.

During this process, the company’s assets and bank accounts are frozen, ensuring the directors do not extract any assets. If the court accepts the liquidation, the process will begin. It will appoint an Official Receiver to close the company, ensuring funds extracted go to outside creditors.

Once they realize all assets, the company will be closed. After this, the court will open an investigation against the company’s director. It is in a bid to unearth any wrongdoing on their side.

Causes of business liquidation

So, what causes the liquidation of companies in Houston? Let’s find out.

  • Improper maintenance of company records

A company’s records are no doubt confidential, containing crucial information about the firm, such as losses and profits realized. Managing such information haphazardly can warrant liquidation. It is because it can lead to data loss to competitors or, in the worst case, cybercriminals.

To mitigate this, a company ought to store its records properly. In so doing, it can eliminate many of its issues and allow for future reference. The current trend is to use accounting software to manage business records.

  • Failure to follow accounting guidelines

Another reason that can warrant liquidation is failure to follow stipulated accounting guidelines. Such guidelines bolster transparency, mitigating corruption within the company. As mentioned, the company’s records ought to be handled with care.

One way to go around it is to use professional accountant services. Thanks to their expertise, they can detect any wrongdoing and provide solutions.

  • Failure to update a company’s transactions

Business transactions should be recorded promptly to enable tracking. If a company decides to make records later, chances are high that the records will be partial.

A company that cannot produce all transaction records at the end of the year will raise eyebrows among its shareholders. Using the services of an accountant can improve updating transactions significantly.

  • Lack of payroll management

Employees are a company’s real assets; without them, a company cannot profit. It is, therefore, critical to improving their morale. And one way to go about it is to have a proper payroll management system.

Besides, an elaborate payroll helps you understand how much you spend to maintain your staff. If a company is hiring continuously with little cash flow, it will run into losses. Likewise, productivity will dip if it has a high-profit margin but pays employees peanuts.

  • Lack of proper auditing

While an internal audit is essential, companies should not overlook external audits. It helps the management to understand the gap between the current position and organizational goals.

An experienced auditor will follow the guidelines and suggestions to prevent improper audit reports. Failure to follow such guidelines can cause voluntary or involuntary liquidation.

How to solve business valuation matters when a company is liquidating

As you’ve seen, there are many reasons why a company can liquidate. During the process, it is paramount to consult business valuation in Houston. The valuator will help a company maximize the liquidation proceeds.

They can also enable the company to determine the fair market asking price. A business evaluator concludes that financial trends such as declining sales and recurring net losses may suggest the company is more valuable if liquidated.

Generally, liquidation value is relevant when the company’s historical and expected earnings don’t contribute incremental value beyond its net tangible asset value.

There are two liquidation value types:

  • Orderly liquidation value (OLV)
  • Forced liquidation value (FLV)

What is orderly liquidation value?

OLV is the amount tangible assets would fetch in an auction-style liquidation if the company were to sell the assets on an “as-is, where-is” basis. The term orderly means the company has control of the sale process. It is also given reasonable time to find a buyer.

A business valuation company will provide the company with two values: fair value and OLV. The company will use the appropriate value to support the purchase price. It is often higher than orderly liquidation value since it assumes the transaction between the seller and buyer will occur willingly.

What is forced liquidation value (FLV)?

As the name suggests, the company will not have control over the sale of its assets. FLV is the amount of money a company would receive if it were to sell its assets in an auction immediately. FLV aims to determine a company’s financial position in the worst circumstance.

It assumes the business will sell its assets in the shortest time possible at a low price. A business valuation company will take each asset and determine its value, assuming it will sell within 60 to 90 days.

The value of all assets is summed up to determine forced liquidation value. There are many assumptions in FLV. Firstly, it assumes the buyer will pay for transport from the seller’s premises. It also excludes the liquidation process cost.

Process of determining liquidation value

The evaluator will start with the company’s balance sheet considering the liabilities and assets value. While the liabilities value is accurate, the value of the assets needs to be adjusted to the current market value. They will also consider unrecorded items such as warranties, patents, customer lists, and pending lawsuits. Alternatively, a business evaluator can help a company determine the value of the business based on a buyer’s expectations and requirements. For example, a buyer can be willing to pay more than the liquidation value if the company has exceptional growth potential.

Need help?

A company that is liquidating requires the services of an expert to determine its fair market value. It can be helpful should a buyer decide to pay more than the liquidation value. If you need an expert business valuation in Houston, reach us via our contact channels.