How does a liquidation analysis work and why is it important in restructuring?
A core Restructuring interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Apply realistic recovery rates (haircuts) to each asset class: cash 100%, receivables 75–85%, inventory 40–60%, PP&E 50–70%, and intangible assets 0–20%. Sum the recovery values, subtract secured claims and administrative costs, then distribute remaining proceeds to unsecured creditors. It is important because it establishes the 'liquidation value' baseline, which determines whether a restructuring is viable (i.e., if going-concern value exceeds liquidation value) and ensures creditors are no worse off than in a Chapter 7 scenario.
WHAT INTERVIEWERS LISTEN FOR
- ✓Estimates recovery rates per asset class
- ✓Compares liquidation value to going-concern value
- ✓Critical for feasibility of restructuring plan
COMMON MISTAKES
- ✗Using overly optimistic recovery rates
- ✗Ignoring administrative costs and priority claims
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