Calculating the liquidation value of your assets can be a highly beneficial practice for businesses. It is used to identify the worst-case scenario in case a company ends up going bankrupt. It is also useful for companies going through the merger process, putting themselves up for sale, or for credit applications from investors or debtors.
If you think your business requires calculating its liquidation value, here is how you can go about doing so.
What is Liquidation Value?
Liquidation value estimates the final amount received by the holder of the financial instrument once the asset is sold. Since a business is generally liquidated during bankruptcy and any tangible assets are sold immediately, these are sold for a much lower percentage than what they were initially worth.
How are Liquidation Values Used?
The financial instrument in its valuation uses the calculation for liquidation value. It determines what the worst-case scenario would be if a business goes bankrupt and is used during mergers, sales, or applying for credit from investors or debtors.
How Do You Calculate Liquidation Value?
To calculate the liquidation value, you need to remove the value of all the assets and liabilities of a business from the financial report. Once these liabilities are subtracted from the assets, then you’ll have a good idea of the liquidation value.
If you decide that you want to perform this calculation, an investor will need to remove intangible assets from the equation—for instance, brand recognition, goodwill, and intellectual properties. Then, determine the expected value by subtracting the company’s liabilities from the assets. Here is how you can begin calculating it:
- Obtain a copy of the most recent annual report. You can request it from the Investor Relations department within any company, or download it directly from their website.
- Find the line item assets and liabilities, which will offer a complete report of the assets that the company owns and its liabilities.
Why is Liquidation Value Significant?
Many investors want to know every aspect of a company. Since they will be investing in a business, they typically want to know about a company’s potential earnings and their liquidation value.
Also, lenders are interested in liquidation value because they are considering borrowers. Bondholders are another group that is interested in liquidation value because they are known as debtors to a business.
The Difference between Market, Book, and Salvage
Other types of calculations that are important in business transactions include market, book, and salvage. While liquidation value is generally lower than book value, but more than salvage value, the assets continually have value. However, they are sold at a loss due to their nature of being sold as fast as possible.
- Market Value: Market value is the highest valuation of assets. It’s possible for its measure to be less than book value if the assets’ value has lessened because of market demand (instead of business use).
- Book Value: Book value is the asset’s value according to the balance sheet. This sheet identifies assets at their historical cost. As a result, the number of assets could be higher or lower than market valuations. If an economic environment with prices increases, then the book value of the assets will be less than the market value. In other words, the liquidation value is what is to be expected of the asset’s value once it has been liquidated or sold, likely at a loss due to historical cost.
- Salvage Value: Last, the salvage value is that given to an asset at the end of its usage. It is also referred to as the “scrap value.” It is the estimated book value of an asset once it depreciates, and depends on what a company anticipates to receive in exchange for an asset when it reaches the end of its life. In essence, an asset’s salvage value is an essential component for calculating a depreciation schedule. Since the salvage value can be so minimal, many companies will just depreciate their assets to $0. As a result, salvage value influences the entire depreciable amount that a business uses during the depreciation schedule.
Now that you know the basics of calculating your assets’ liquidation value, you can use it in your business tactics. That way, you’ll know what to do if you find yourself in a worst-case scenario or if your company is about to go bankrupt. Also, if you think the merger or sales process is a good plan for your business, the liquidation value can be beneficial to you.
Work With Michaels Global Trading
Since 2013, Michaels Global Trading has been assisting companies of all sizes and in various industries to manage their surplus inventory and assets. We also offer services like an appraisal, auction, liquidation, and decommission tailored to each unique client. We have always maintained a top level of professionalism and value transparency with our customers.
We Put Our Clients First
We know that transparency and integrity go a long way in a working relationship. That’s why we value our client relationships and work with them to execute strategies that will benefit them directly. We listen closely to your requirements and are always honest with you, and we keep up timely communication to meet your needs.
Get in Touch with Us Today
At Michaels Global Trading, we have the resources, knowledge, and contacts to deliver the best value for your assets and inventory. Give us a call at 888-902-7531 or email us at sales@michaelsglobaltrading.com so that we can discuss your unique needs.
