Understanding the Orderly Liquidation Value in Chapter 11 Bankruptcy
The word “bankruptcy” understandably may strike fear into many hearts. Large, well-known companies like Macy’s, Sears, David’s Bridal, Nine West, and Mattress Firm have all filed Chapter 11 bankruptcy. However, it is not just big corporations who can and do file for Chapter 11 bankruptcies; individuals and small businesses may file as well.
Filing for Chapter 11 bankruptcy does not necessarily spell doom for your business or finances. Instead, Chapter 11 is there to help you reorganize/restructure your debts and to (hopefully) help you preserve your business instead of being forced to liquidate all of your assets as you would in a Chapter 7. Chrysler and General Motors have both made it out of the red through Chapter 11.
One concept you will have to understand if you are considering Chapter 11 is the Orderly Liquidation Value (OLV) of your assets. Assuming that you will have to liquidate some or a lot of your assets to preserve your business, you have to understand the concept of how your assets will be valued/assessed and how they differ.
Fair market value is the monetary value given to an asset when there is no pressure for the seller to sell and the buyer to buy. This means that the buyer will give the seller the amount of money that both sides deem is fair in exchange for that asset/item. There is no time limit for the seller to sell that asset/item. As the seller, you would get a relatively higher price than you would in an orderly liquidation.
Orderly liquidation value, on the other hand, is the monetary value given to an asset under the assumption that the asset MUST be sold because the seller needs to sell it. There is pressure for the seller to sell the asset, but they are allowed a longer period of time to sell the asset. The seller is usually constrained in their location, such as at an auction. There is more flexibility with this option for the seller to find a buyer willing to pay more. However, because the seller is under pressure to sell, the buyer can get the asset/item for a comparatively lower price than you would under fair market value. However, this is still the better option compared to a forced liquidation.
Forced liquidation value is when the seller HAS to sell an asset, they are constrained by their location (usually at an auction), and they are under a time constraint to do so. This is the extreme opposite to the fair market value. You as the seller get the least amount of money for your assets in this case.
In essence, having the orderly liquidation value buys you time. That is, knowing the OLV of your assets allows you to acquire cash to pay down your debts during Chapter 11 reorganizing/restructuring and provides you with a buffer to figure things out in the meantime.
In terms of appraisal benefits, fair market value is the most favorable scenario. You get the most money for your sale. OLV is the middle road in that you need money relatively quickly, but you also want to get a little bit more money for your assets and you have the luxury of time to wait for a buyer. Forced liquidation gets you the least amount of money because you don’t have the luxury of time.
Contact Lucid Law
Attorney Karina Lucid has experience working with appraisers in Chapter 11 bankruptcy in New Jersey. If you need help with any of the concepts above, please schedule an appointment with us by calling us at (908) 350-7505 or contact us here.