Voluntary liquidation: When is it financially profitable?

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.