When providing an orderly liquidation value to the lender, many different factors are taken into consideration. One that is often overlooked is the absorption factor. When a company has a considerable amount of product which they are not actively selling, we must consider how this product will be absorbed into the marketplace in a relatively short period of time. If the product is something that the customer can purchase and hold until it is needed, we may be able to convince them to purchase in excess of their actual demand by offering discounted pricing. If, however, the product is perishable or carries a shelf life of some sort, even the most aggressive discounting may not persuade the customer to purchase additional inventory.
It is important for the lender to consider the absorption factor given that this often has a significant role in determining the value of inventory in a liquidation. If the product has saturated the current customer base, alternate sales channels must be explored. In our experience, selling into avenues which are not familiar with the product during a liquidation generally requires greater discounts than are necessary when selling to the customers who are already familiar with the product. This is why it is so important to understand how many months of inventory the company has on hand, based on sales history and open orders. If the company has more than 12 months of inventory on hand, these items are generally more difficult to sell through and often require significant discounts in a liquidation.
