Liquidation Value


Bankrupt corporations or households will frequently require appraisals to help in assessing the values of the viable assets which may have to be liquidated, within a short amount of time, to settle debts. In such cases a special type of appraisal based on “liquidation value” should be written.

Liquidation value is distinct from other types of value because the element of time is the overriding consideration in deciding how much an object is worth. Unlike fair market value, which is used in IRS situations, or marketable cash value, which is used in divorce cases, liquidation value is structured with the assumption that the appraised objects must be sold in the very near future in a forced sale situation.

Under such circumstances, an “orderly sale” is not possible; and those overseeing a forced sale would not be able to sell the objects at a major auction house because the sales procedure – frequently stretching out between five to eight months, from moment of consignment to receipt of final payment
– would prove much too long for the pressing needs of a bankruptcy liquidation.

The time constraints of a bankruptcy preclude many common practices consignors rely on when dealing with major auction houses. In such cases, one will not be able to sell objects in specialized sales. The American highboy cannot be sold in a sale of important American furniture and decorative arts which take place only twice a year; but it will have to be sold in a general sale of all types of furniture and decorative arts mixed together with any paintings, works on paper and collectibles which may also be part of the collection. Nor will one have the luxury of time to research and catalogue properly the appraised objects. Most likely the only catalogue which will be produced, by those selling the collection, will be a photocopied list of works, with phrases such as “attributed to” and “in the style of” liberally peppered throughout whatever text there may be. It is also highly improbable that any of the objects will be photographed for the sale list. There simply may not be enough time to take photos.

In all likelihood a bankruptcy sale will not receive much publicity. Perhaps there will be time to place an ad in a local newspaper or weekly trade publication, but a display ad in a monthly periodical will probably be out of the question because glossy publications require ad copy to be delivered months before the scheduled publication date. The Japanese collector of impressionist paintings will never know that there are some available in a U.S. bankruptcy sale, unless the Japanese collector is lucky enough to have a U.S. agent with a keen eye on local newspapers.

Consequently, those selling objects in a bankruptcy situation pay a steep price for the convenience of receiving payment in a short amount of time. They will not receive the higher prices the same objects would fetch if they were to be sold in an orderly fashion.

The appraiser, in turn, should be well aware of such economic realities and the liquidation value(s) of appraisals for bankruptcy purposes should be significantly lower than values used in other types of appraisals.

In sum, if one were to construct a pyramid of values, replacement value for insurance purposes would be at the top as the highest value and this would be followed, in descending order, by fair market value for IRS purposes, marketable cash value for equitable distribution and, at the bottom, liquidation value for bankruptcy situations.

The selection of the correct value for a specific valuation purpose is just one of the many elements of a correctly prepared appraisal. For a complete list of the “Elements of a Correctly Prepared Appraisal”, please contact the Appraisers Association of America.

This article appeared in the Antiques and The Arts Weekly, March 15, 1996, page 53 and was written by Victor Wiener.