Restructuring or liquidation? How do you compare them?
For a company in difficulty, the real question is whether carrying on or selling the assets to repay debt leaves more value for creditors and shareholders. It can only be answered by comparing both scenarios on the same assumptions.
A company in financial distress has two basic paths: restructure its debt and keep operating, or stop operating and repay creditors by selling its assets, that is, liquidation. Which is better is not a matter of opinion but of calculation: which scenario leaves more value for creditors and shareholders?
The way to answer that is to compare both scenarios on the same date, the same list of assets and the same debt inventory.
Why the comparison matters
When lenders assess a restructuring proposal, they ask themselves: “What happens if I reject this?” The answer is usually liquidation. If restructuring gives a creditor more than it would receive in liquidation, with reasonable certainty, there is a strong reason to accept.
The comparison is therefore not only for management; it is a core document for the negotiation itself. In Turkish concordat proceedings, comparing the plan with what creditors would receive in bankruptcy is also among the elements the legislation requires; I discuss this in the concordat article.
How is the liquidation scenario calculated?
In the liquidation scenario, the cash each asset would raise in a forced sale is estimated. Book value is not a guide here:
| Asset | What to watch in liquidation |
|---|---|
| Trade receivables | Once operations stop, customers may delay payment or claim set-offs. |
| Inventory | Work in progress and made-to-order stock may sell for very little. |
| Machinery and equipment | The second-hand market and removal and transport costs set the value. |
| Real estate | Time to sell and market conditions matter. |
| Intangible assets | Often produce no value in liquidation. |
The costs of liquidation are then deducted: employees’ severance and notice entitlements, the costs of the process, tax liabilities. What remains is distributed among creditors according to the statutory order of priority and the collateral structure.
How is the going-concern scenario calculated?
In the going-concern scenario, the question is how much cash the business can generate under the restructured debt schedule. That requires a cash flow projection based on realistic assumptions. The proposed payment plan must be supported by the projection; otherwise the offer looks attractive on paper but cannot be delivered.
The going-concern scenario is rarely enough on its own; a lasting recovery needs an operational turnaround plan with concrete steps on costs, margins and working capital.
Presenting the comparison
A good comparison puts two numbers side by side for each creditor group: expected recovery in liquidation and expected recovery under restructuring. The time value of money must be taken into account; an amount paid over three years is not equivalent to the same amount paid today.
Assumptions should be stated explicitly and sensitivities shown for the critical ones. What earns a creditor’s trust is not an optimistic scenario but a calculation whose assumptions are open to challenge.
You can see the comparison applied in the Restructuring vs. Liquidation Analysis.
Frequently asked questions
What is FYY?
FYY (finansal yeniden yapılandırma, financial restructuring) refers to restructuring the bank debt of companies in financial difficulty under framework agreements signed with credit institutions within Turkish banking regulation. Because its scope and conditions change with legislation, current rules must be confirmed for any actual application.
Is liquidation always the last resort?
No. Where a business loses cash permanently and recovery is unlikely, an early and orderly liquidation can preserve more value for everyone than prolonged uncertainty.