Lesson 1 of 7
Selling a company in pieces
A liquidating company files a statement of net assets, not a balance sheet. Read one, find the residual to common, and see where the timing discount sits.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- Once liquidation is imminent, the accounts change basis: assets are carried at what they are expected to realise and a statement of net assets replaces the balance sheet.
- The residual to common is total assets less total liabilities, and one of those liabilities is the cost of running the wind-down.
- What is left is an estimate with a date on it, and the filing says so in its own words.
A liquidation is the one situation where the balance sheet is trying to answer the question an investor actually asks. Under the liquidation basis, assets are measured at their estimated net realisable value, and the statements stop pretending the business will continue.
One real statement of net assets in liquidation
- Cash and cash equivalents24,335$k
- Accounts and notes receivable+15,305$k
- Restricted cash+2,333$k
- Properties held for sale+29,966$k
- Accounts payable, accruals and other−3,871$k
- Operating lease liabilities−3,770$k
- Estimated costs in excess of receipts during liquidation−4,418$k
- Net assets in liquidation= 59,880$k
Reading the statement
From the filing to the residual
-
Add the assets at their estimated realisable value: cash of 24,335, receivables of 15,305, restricted cash of 2,333 and properties held for sale of 29,966. Total assets are 71,939 thousand dollars.
-
Subtract the liabilities: accounts payable of 109, accrued expenses and other of 3,737, operating lease liabilities of 3,770, the wind-down cost line of 4,418 and other liabilities of 25. Total liabilities are 12,059.
-
The difference is net assets in liquidation: 59,880 thousand dollars.
-
Divide by the units outstanding. The filing states the result directly: liquidating distributions of 1.91 dollars per unit on the units outstanding at that date.
The line that is the whole subject
"Liability for estimated costs in excess of estimated receipts during liquidation" is 4,418 thousand dollars, which is 7.4 percent of the residual. It is the estimated cost of running the entity while the assets are sold: the staff, the professional fees, the insurance, the taxes, less whatever the remaining assets earn along the way.
That line is where a liquidation is won or lost. It scales with how long the wind-down takes, and the filing says so: the estimates will vary with the length of time necessary to complete the plan.
The estimate moves, and the filing shows it moving
What the filing refuses to promise
The same document states that it is not possible to predict with certainty the timing or the aggregate amount that may ultimately be distributed, and that no assurance can be given that distributions will equal or exceed the estimate presented.
That sentence is the correct posture for a reader as well. A liquidation value is a dated estimate made by the people selling the assets, subject to the sale prices they get and the time they take. The arithmetic above is exact. The inputs are not.
Why a liquidating entity does not trade at its net assets
Three gaps sit between a stated net asset figure and what a holder receives, and none of them is hidden.
The first is time. A distribution two years away is worth less than the same distribution today, and the statement discounts nothing: it adds up amounts without dating them. The second is the realisation risk in each asset line. A property held for sale carries an estimate made by valuers; a note receivable carries an assumption that the buyer of a sold business pays. The third is the cost line itself, which is the only forecast on the page and the one most likely to grow if anything takes longer than planned.
A reader can put numbers on all three, and the discipline is to put them on separately rather than to apply one round discount to the total. Two of the three are asset-specific and one is a function of the calendar, so they move for different reasons and at different speeds.
Check yourself
Under the liquidation basis of accounting, how are assets measured?
- At historical cost less depreciation
- At their estimated net realisable value
- At the price the shares last traded at
Show the answer
Answer: B.
The basis changes when liquidation becomes imminent: assets are carried at what they are expected to realise, and a statement of net assets replaces the balance sheet.In the filed statement above, what were net assets in liquidation?
- 71,939 thousand dollars
- 59,880 thousand dollars
- 12,059 thousand dollars
Show the answer
Answer: B.
Total assets of 71,939 less total liabilities of 12,059 is 59,880 thousand dollars, which the filing states as 1.91 dollars per unit.What does the line for estimated costs in excess of receipts during liquidation represent?
- The company's remaining debt
- The estimated net cost of running the entity while the assets are sold
- An estimate of legal damages
Show the answer
Answer: B.
It is the wind-down cost: staff, professional fees and other running costs net of receipts, and it grows with the time the plan takes.Sources
- LUB Liquidating Trust, Form 10-K for the fiscal period ended 31 December 2022, filed 2023-03-28: the consolidated statement of net assets in liquidation, the statement of changes in net assets in liquidation, the 1.91 dollars per unit estimate, and the company's own statements about the uncertainty in it.
What this leaves out
- The figure groups accounts payable, accrued expenses and other liabilities into one line so the bridge fits. The filing lists them separately and the totals are unchanged.
- Figures are in thousands of dollars as filed, for one period, and later filings revised them.
- Net assets in liquidation is an estimate made by the entity, not a market price and not an amount anybody received.
- This is a closed, historical situation used to show how the statement reads. Nothing here is advice about any security.