Liquidation Premise
Definition
A liquidation premise is the valuation assumption that an asset is sold on its own, over a defined timescale, rather than valued within a continuing and profitable business. It is the premise of value that the RICS Red Book and VPGA 6 direct valuers to adopt when an intangible asset is being appraised as loan collateral, because it mirrors the situation a lender actually faces on enforcement: the borrower has failed and the IP must be realised separately from the enterprise it once supported. Liquidation premise valuation comes in two grades. An orderly-liquidation basis assumes a reasonable marketing period to find a willing buyer and typically yields a higher figure; a forced-sale basis assumes a compressed, distressed timetable and yields the lowest. Because the lender's downside is what a liquidation premise measures, it is the appropriate foundation for setting a prudent loan-to-value and for estimating loss given default. Applying it well means using conservative inputs throughout - a low-end royalty rate, a risk-weighted discount rate, a finite economic life over a perpetuity, and cautious or absent terminal value - and presenting ranges and sensitivity rather than a single point estimate that could flatter the downside. The resulting orderly-disposal value is then tempered by the three lender tests of separability, saleability and legal strength before an advance rate is fixed. For a UK borrower, the practical consequence is that the collateral figure underpinning a facility will sit well below any going-concern or fundraising valuation of the same patents or trade marks. For accountants and corporate-finance advisers, instructing the valuer explicitly on a liquidation premise - and confirming which grade the lender expects - is what makes the report credible to a credit committee.
Complementary Terms
Concepts that frequently appear alongside Liquidation Premise in practice.
Orderly liquidation value is the estimated proceeds an asset would realise if sold within a reasonable marketing period by a willing but compelled seller, rather than in a rushed distress sale. It sits between market value and forced sale value, and it is the premise a prudent lender leans on when sizing security against intangibles.
Forced sale value is the estimated proceeds from selling an asset under compulsion and time pressure, where the seller cannot wait for a proper marketing period. It is the most conservative of the common realisation bases, sitting below both market value and orderly liquidation value, and it reflects the discount a buyer extracts when they know the sale must happen quickly.
Net orderly liquidation value is the orderly liquidation value of an asset less the direct costs of realising it, giving the amount a lender would expect to net after a controlled disposal. It strips out disposal expenses such as agent and legal fees, marketing costs, storage, and any taxes or commissions, leaving the figure that would actually reach the secured creditor.
Premise of value is the assumption about the circumstances in which an asset is exchanged - in particular whether it is sold as part of a continuing business or realised on its own, and how much time the seller has. Where the basis of value fixes which question the valuer answers, the premise of value fixes the conditions under which the exchange is assumed to occur, and the two together determine whether a figure is appropriate for lending.
Basis of value is the fundamental assumption about the transaction and parties that a valuation measures - in effect, the precise question the valuer is answering. Under the International Valuation Standards the basis of value is a formal statement (renumbered to IVS 102 in the 2025 edition, previously IVS 104) that must be selected and disclosed before any figure is produced, because the same intangible asset can carry very different values depending on which basis is chosen.
VPGA 6 is the RICS Red Book Valuation Practice Guidance Application that governs the valuation of intellectual property rights, including the specialist scenario of intangible assets pledged as loan collateral. It sits within the RICS Valuation - Global Standards (Red Book) and works alongside the RICS professional standard "Valuation of intellectual property rights" (2020) and the International Valuation Standards, so that vpga 6 intangible assets work is delivered to a consistent, auditable credit standard rather than an informal estimate.
Loss given default is the proportion of a loan a lender expects to lose after a borrower defaults, once any recoveries from realising collateral and enforcing security have been taken into account. Loss given default sits at the heart of how IP-backed credit is priced and provisioned, because it captures what actually happens when the primary repayment source, operating cash flow, fails and the lender must fall back on the intangible collateral.
Related FAQ
How is orderly liquidation value used in IP lending?
Orderly liquidation value estimates what the IP would fetch in a controlled sale on default. Lenders use it as the base for loan-to-value, discounting a going-concern figure to reflect realistic recovery.
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