How is orderly liquidation value used in IP lending?

Full Explanation

Orderly liquidation value is the amount an asset would realise in a controlled, reasonable-timeframe disposal, rather than in an emergency fire sale. In IP lending it answers the lender's core question: if the borrower defaults and the IP has to be sold, what will it actually be worth. That is a very different figure from a going-concern valuation, which assumes the business continues to exploit the asset. Because a lender's downside is the default scenario, the orderly-liquidation figure, and its more severe cousin the forced-sale value, are the numbers that drive credit decisions. RICS guidance on IP debt financing, in VPGA 6 Appendix A, is explicit that collateral should be assessed on a liquidation premise. The valuer applies conservative inputs to reach it: a finite economic life, a risk-weighted discount rate, low-end royalty assumptions and cautious terminal value, presented with sensitivity analysis and value ranges rather than a single point estimate. The result is a defensible view of recovery under stress. From there, security value is derived by weighing the three lender tests, separability, saleability and legal strength, against that orderly-disposal figure, and that in turn sets the loan-to-value. Registered rights that can be cleanly separated and sold support more borrowing than know-how that only has value inside the business. The distinction matters to founders because it explains why an advance can look modest against a headline valuation. Broad-market LTVs of roughly 20 to 40 per cent, rising towards 50 per cent with insurance backing, are calculated against the liquidation view, not the going-concern one. It also explains why lenders treat collateral as the secondary repayment source: the IP is a fallback, realised through orderly disposal, while operating cash flow does the primary work of servicing the loan. As a next step, when you commission a valuation, ask the valuer to state the orderly-liquidation value and the forced-sale value explicitly, with the assumptions behind each. Knowing the recovery figure your lender will anchor to lets you size your borrowing expectations realistically and avoid a gap between the number you hoped for and the number a credit team will fund.

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