Meaning
Recovery value estimates provide the projected net amount of cash a lender would receive from the sale of assets in an orderly liquidation over a specified period. Calculation of net orderly liquidating value involves subtracting the costs of dismantling, moving and selling the equipment from the gross sales price. This figure assumes the sale happens in a controlled manner rather than a forced auction.
It establishes the maximum credit available in an asset based loan.
Appraisal Methodology
Professional appraisers visit the site to inspect the condition of machinery and the age of the inventory. They determine the net orderly liquidating value by comparing current assets to recent sales in the same industry.
Borrowing Baseline
Credit availability hinges on this valuation to ensure the loan is fully collateralised. If the net orderly liquidating value of the production line drops, the lender will reduce the advance rate. A gap between the supplier’s forecast and the demonstrated rate of sales can lead to a lower appraisal.
This metric focuses on the capability of the assets to be sold as stand alone units. It ignores the value of the business as a going concern. The result of this audit dictates the total liquidity available for operations.
Market Stability
Economic shifts can quickly alter the demand for specialized manufacturing gear. When the net orderly liquidating value is stable, it provides a reliable floor for financial planning.
