When valuing a business, it’s important to clearly identify the appropriate premise of value. There are two basic options: going concern value or liquidation value. In general, liquidation value sets the floor for a company’s value. When a company is “worth more dead than alive” — such as in a Chapter 7 bankruptcy filing — liquidation value is typically the appropriate premise of value. But it also may be relevant in other situations, as a recent Michigan Court of Appeals case demonstrates.
Going Concern vs. Liquidation Value
Most valuations focus on a business’s going-concern value. That is, what’s the value of a business enterprise that’s expected to continue to operate into the future? But in certain situations, liquidation value can be an important benchmark.
There are two types of liquidation value, according to the International Valuation Glossary — Business Valuation. In an orderly liquidation, assets are sold piecemeal over a reasonable period of time to maximize proceeds. Alternatively, forced liquidation value assumes assets will be sold as quickly as possible, potentially via auction. Orderly liquidation value is generally the higher of the two types.
Although liquidation value is most commonly used in bankruptcy cases, a modified version of a company’s liquidation value was determined to be the appropriate premise of value in a recent forced shareholder buyout case. In Pitsch v. Pitsch Holding Co. (No. 356184, Mich. App. 2022), the Michigan Court of Appeals ruled that the trial court hadn’t erred in disregarding the company’s going concern value when appraising the plaintiffs’ shares.
The case involved a 15-year legal battle over the buyout of the defendants’ shares in a family-owned asset-holding company. The trial court had appointed a special master to investigate the company’s operations and make a recommendation regarding asset valuation and proposed methods for disposition of the company. The special master concluded that the parties would receive much less if the company dissolved and liquidated than if one side sold its shares to the other. He reached a valuation of $1.9 million per shareholder under a modified liquidation premise of value.
However, the special master’s valuation included liquidation expenses and tax consequences that wouldn’t happen in the sale. It also didn’t account for certain assets, including cash-advance receivables, noncompete covenants with the defendants and intangibles.
The special master testified that the modified liquidation value was roughly the midpoint between the company’s net asset value as a going concern and its liquidation value. He also concluded that a stock sale was the most effective, least expensive method of resolution.
On appeal, the plaintiffs’ attorneys never cited any specific error in the special master’s reasoning, assumptions, valuation techniques or conclusions. So, the court upheld the lower court’s valuation, compelling the plaintiffs’ sale to the defendants for $1.9 million per shareholder.
Get It Right
Liquidation value isn’t always relevant. An experienced valuation professional understands the differences between the two premises of value and can help you navigate this complex topic. Contact us for more information.