LIQUIDATION VALUE
Liquidation value is the net value of a company’s physical assets if it were to go out of business and the assets sold. The liquidation value is the value of company real estate, fixtures, equipment, and inventory. Intangible assets are excluded from a company’s liquidation value. A liquidation value is an estimation of the final value that will be received by the holder of financial instruments when an asset is sold, typically under a rapid sale process. A business is typically liquidated as part of a bankruptcy process and tangible assets are sold quickly, often for pennies on the dollar, for an extremely low percentage of their original cost. In another context, when an investor chooses to exit a profitable venture, the value of shares when its put up for sale is also considered a liquidation value.
Key points:
- Liquidation value is the total worth of a company’s physical assets if it were to go out of business and its assets sold.
- Liquidation value is determined a company’s assets such as real estate, fixtures, equipment, and inventory. Intangible assets are excluded from a company’s liquidation value.
- Liquidation value is usually lower than book value, but greater than salvage value.
- Assets are sold at a loss during liquidation because the seller must gather as much cash as possible within a short period.
The calculation of liquidation value is used in financial instrument valuation to simulate the worst-case scenario when a company or business goes bankrupt. It is also used when a healthy company considers undergoing a merger, putting itself up for sale, or applying for credit from its investors or debtor. Liquidation value can be calculated by removing the value of all assets and liabilities of a company from its financial report. The subtraction of liabilities from assets will give investors the liquidation value.When working with liquidation value calculations, an investor should exclude the intangible assets, such as goodwill, brand recognition, and intellectual property.
Calculation Example:
Unlimited Ltd. listed a market capitalization of Rs.500 crore on the stock exchange. The company also reported liabilities totaling Rs.150 crore and a book value of Rs.400 crore. The appraiser estimates the value of Unlimited’s assets at Rs.380 crore in the auction market. The liquidation value of Unlimited Ltd. is Rs.230 crore, found by subtracting Rs.150 crore in liabilities from Rs.380 crore in auction value.
