What Is 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.
Key Takeaways
- 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.
Understanding Liquidation Value
There are generally four levels of valuation for business assets: market value, book value, liquidation value, and salvage value. Each level of value provides a way for accountants and analysts to classify the aggregate value of assets. Liquidation value is especially important in the case of bankruptcies and workouts.
Liquidation value does not include intangible assets such as a company's intellectual property, goodwill, and brand recognition. However, if a company is sold rather than liquidated, both the liquidation value and intangible assets determine the company's going-concern value. Value investors look at the difference between a company's market capitalization and its going-concern value to determine whether the company's stock is currently a good buy.
Not every asset can be sold for what was paid for it or what is still due on the note to buy that asset. Businesses look at the recovery rate on an asset-by-asset basis. Cash would have a 100% recovery rate. Accounts receivable, inventory, and plant equipment would have a lower recovery rate. These rates tallied together will provide an estimated recovery value of a company in case of liquidation.
Potential investors will assess the liquidation value of a company before investing. Investors want to know how much of their funds would be returned in the event of bankruptcy.
Market vs. Book vs. Liquidation vs. Salvage
Market value typically provides the highest valuation of assets although the measure could be lower than book value if the value of the assets has decreased due to market demand rather than business use.
The book value is the value of the asset as listed on the balance sheet. The balance sheet lists assets at the historical cost, so the value of assets may be higher or lower than market prices. In an economic environment with rising prices, the book value of assets is lower than the market value. The liquidation value is the expected value of the asset once it has been liquidated or sold, presumably at a loss to historical cost.
Finally, the salvage value is the value given to an asset at the end of its useful life; in other words, this is the scrap value.
Liquidation value is usually lower than book value but greater than salvage value. The assets continue to have value, but they are sold at a loss because they must be sold quickly.
Discount footwear company, Payless, filed for bankruptcy in February 2019. Despite once owning 3,400 outlets in 40 countries, the company announced it would close all of its U.S. and Puerto Rico locations.
Example of a Liquidation
Liquidation is the difference between some value of tangible assets and liabilities. As an example, assume liabilities for company A are $550,000. Also, assume the book value of assets found on the balance sheet is $1 million, the salvage value is $50,000, and the estimated value of selling all assets at auction is $750,000, or 75 cents on the dollar. The liquidation value is calculated by subtracting the liabilities from the auction value, which is $750,000 minus $550,000, or $200,000.
FAQs
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.
What is an example of liquidation? ›
To liquidate means to convert assets into cash. For example, a person may sell their home, car, or other asset and receive cash for doing so. This is known as liquidation.
What is an example of a forced liquidation value? ›
An Example in Liquidation Value from Retail
However, in a forced liquidation, the inventory may only fetch 25% of its original cost, the fixtures may sell at 50% of their book value, and the furnishings might only amount to 10% of their recorded worth.
How do you explain liquidation? ›
The term “liquidate” means converting property or assets into cash or cash equivalents by selling them on the open market. Liquidation similarly refers to the process of bringing a business to an end and distributing its assets to claimants. Liquidation of assets may be either voluntary or forced.
How to determine liquidation value? ›
While liquidation, the Liquidation value of Liabilities = Book Value of Liabilities. So the formula above becomes, Liquidation Value Formula = Liquidation Value of Assets – Book Value of Liabilities.
What are the two types of liquidation value? ›
Orderly liquidation: In an orderly liquidation, assets are sold piecemeal over a reasonable period of time to maximize proceeds. Forced liquidation: Forced liquidation value assumes assets will be sold as quickly as possible, possibly in an auction.
What is the best example of liquidation strategy? ›
Examples of Liquidation Strategy
In 2010, Blockbuster filed for Chapter 11 bankruptcy and decided to liquidate its assets to pay off its debts. The company closed down its remaining stores and sold off all its assets, including its trademark, to Dish Network Corporation. Another example is Toys “R” Us.
What is the common term for liquidation? ›
A process which results in a company being shut down. All the company's assets are sold, and the money raised is used to repay its debts. The term 'winding-up' is also used.
How do you liquidate your assets? ›
Hire a professional auctioneer and hold a public auction. Pay a business broker a fee to sell off your assets. File bankruptcy, in which case the bankruptcy trustee will sell your assets and pay off your creditors with the proceeds. Assign your assets and debts to a company that specializes in liquidating businesses.
What is the immediate 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.
A company's liquidation value is the net value of all of its physical assets. This is if they were to go out of business and have their assets sold. It is a financial instrument used to simulate the worst-case scenario of a company going bankrupt and having to liquidate its assets.
How do you set liquidation price? ›
However, a general formula that applies to most cases is: Liquidation price = (Entry price * Leverage) / (Leverage + Margin factor - Fees - Funding rate). This equation requires the entry price, leverage, margin factor, fees, and funding rate.
Is liquidation good or bad? ›
Liquidating assets can be good and natural in some cases, such as when an investor exits a position intentionally to realize profits or when a company liquidates assets to redeploy their value in an area it finds strategically important.
What is the liquidation price? ›
Liquidation price is the price at which your leveraged position will be closed by the exchange if your margin ratio drops below a certain threshold. Margin ratio is the percentage of your equity (balance plus unrealized profit or loss) to your position size.
What is the concept of liquidation value? ›
Liquidation value is the likely price of an asset when it is allowed insufficient time to sell on the open market, thereby reducing its exposure to potential buyers. Liquidation value is typically lower than fair market value.
How does liquidation price work? ›
Liquidation price is the price at which your leveraged position will be closed by the exchange if your margin ratio drops below a certain threshold. Margin ratio is the percentage of your equity (balance plus unrealized profit or loss) to your position size.
