Abstract
The aim of this article is to offer insight into a concept making it possible to assess the financial rationality of the voluntary liquidation of businesses. The author of the study presents a decision-making algorithm that should be applied before deciding to voluntarily liquidate a business entity. The algorithm is based on the concept of Value Based Management (VBM), and the related calculations have been performed following the basic rules of mathematical finance. The presented solution is also based on the calculation of free cash flow generated by an enterprise for its owners and on investigating the relationship between the said cash flow and the rate of return expected to be attained by the enterprise’s owners. Because no such models are given or discussed in the literature covering the subject matter, it appears that the proposed solution may become a valuable tool to improve the process of making a decision in the scope of voluntary liquidation of an enterprise.
Highlights
The literature devoted to the subject matter in question discusses various ways an enterprise can choose to pursue its exit from the market
Both liquidation through merger and acquisition (M&A) and voluntary liquidation are possible when the value of the liquidated assets minus the liquidation costs exceeds the value of the firm’s liabilities – in such a situation it is still possible to pay all obligations towards creditors [Kim and Schatzberg, 1987, pp. 311–328]
The contemporary literature devoted to the subject matter of company liquidation focuses mainly on determinants of company liquidation and on the qualities of liquidated firms
Summary
The literature devoted to the subject matter in question discusses various ways an enterprise can choose to pursue its exit from the market. There are no models or decision-making schemas making it possible to assess the rationality of the liquidation of a firm from a financial perspective. This topic seems to be of great significance. The subject matter becomes even more noteworthy given the fact that company owners, often attached emotionally to the firm, may fail to see the financial reasonability behind voluntary liquidation if no appropriate tools are applied. I present a coherent and applicable model, making it possible to take a conscious and rational decision in the scope of subjecting a firm to voluntary liquidation. In subsection 3, I present a model making it possible to assess the financial rationality of a decision to liquidate a firm.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
