Answers / Restructuring

How do you build a liquidation analysis, and why does forced-sale versus orderly wind-down change recoveries by asset class?

A core Restructuring interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.

THE SHORT ANSWER

A liquidation analysis estimates what each creditor class recovers if the business is broken up rather than continued — it's the floor/benchmark against which a restructuring plan is tested. You take the balance sheet asset by asset and apply recovery percentages: cash near 100%, receivables high but discounted for collectability, inventory depending on type (finished goods recover more than WIP/raw), property/plant/equipment at appraised or scrap values, and intangibles/goodwill usually near zero. Then deduct the costs of liquidation — administrator fees, employee claims, wind-down costs — and apply the waterfall by priority. Forced-sale assumptions (fire sale, distressed timeline) yield sharply lower realizations than an orderly wind-down with time to find buyers, especially for specialized PP&E and inventory. The recovery you assume drives the 'no creditor worse off' test and negotiating leverage.

WHAT INTERVIEWERS LISTEN FOR

  • Asset-by-asset recovery %, then costs, then waterfall
  • Cash≈full, receivables/inventory discounted, intangibles≈0
  • Forced-sale << orderly wind-down, esp. specialized assets
  • Sets the floor for the no-worse-off test

COMMON MISTAKES

  • Using book values as recoveries
  • Ignoring liquidation costs and priority
  • No distinction between forced and orderly sale

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