The value of a business under a rapid sale process
What is Liquidation Value?
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.
What is Liquidation Value Used For?
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.
How to Calculate Liquidation Value
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 $500 million on the stock exchange. The company also reported liabilities totaling $150 million and a book value of $400 million. The appraiser estimates the value of Unlimited’s assets at $380 million in the auction market.
The liquidation value of Unlimited Ltd. is $230 million, found by subtracting $150 million in liabilities from $380 million in auction value.
Recent Example
Sears Canada, hit with tough competition for internationaldepartment stores, recently received court approval to liquidate its assets. This move comes as a last resort to repay creditors after the company ceased operations. Given the rapid sale of assets (including inventory) at very low prices it remains to be seen if creditors will be made whole or not.
According to the CBC article referenced above, “Company chairman Brandon Stranzl had been trying to put togethera bid to keep the company goingwhile it restructured itself, but those efforts did not materialize into a planthat would have allowed the chain to continue… ‘I am satisfied that there is no other viable alternative,’ Justice Glenn Hainey said.”
Additional Resources
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FAQs
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.
What is the liquidation value technique? ›
Liquidation value can be calculated using two methods: book value and net realizable value. Book value is the value of the assets and liabilities as reported on the balance sheet, adjusted for depreciation, amortization, and impairment.
Should liquidation value be used for dying or losing companies? ›
Liquidation value should be used for dying or losing companies where liquidation is imminent to check whether profits can still be realized upon sale of the assets owned. A unique callout for liquidation value is fi the firm is operating under a proprietorship or a partnership model.
Why is liquidation value more realistic than book value? ›
Liquidation value is typically lower than book value because it provides a more realistic assessment of the tangible assets' worth in an actual business shutdown.
What is the formula for liquidation price? ›
The formula, Liquidation price=Entry price1+(Leverage×(1−Initial margin ratio))Liquidation price=1+(Leverage×(1−Initial margin ratio))Entry price, incorporates entry price, leverage, and initial margin ratio. This informs traders of the point at which their position will be automatically closed.
Is liquidation value the same as fair market 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.
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.
How to calculate orderly liquidation value? ›
The market value of tangible assets, which includes fixed and current assets, is obtained, after which all liabilities are subtracted from the total liquidation value of the assets to obtain the OLV.
How to calculate going concern value? ›
Going concern value can be determined using various valuation methods, including the market approach, income approach, and asset approach. These methods consider the company's financial statements, future profitability projections, and the present value of its assets.
What is going concern value vs liquidation value? ›
Liquidation value is the amount that could be realized by selling the assets of a business in a forced or distressed situation. Going concern value is the amount that could be obtained by selling the business as a whole, assuming that it will continue to operate and generate cash flows in the future.
Income based business valuation methods, such as the Discounted Cash Flow, are very well suited for valuing a business that currently runs at a loss. This well-known method lets you calculate business value based on the company's earnings forecast and risk assessment.
Who benefits from liquidation? ›
The liquidation of an insolvent company allows an independent registered liquidator (the liquidator) to take control of the company so its affairs can be wound up in an orderly and fair way to benefit creditors. There are two types of insolvent liquidation: creditors' voluntary liquidation. court liquidation.
When to use liquidation value? ›
Liquidation value is primarily useful for a creditor involved in mortgage recovery. It will provide you with an estimate of the price you can hope to obtain for a rapid sale.
Is cash included in liquidation value? ›
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.
What is the forced liquidation value? ›
Forced Liquidation Value (FLV) is the monetary value of an asset that can be expected in a transaction with a single seller and multiple potential buyers, where the seller is under a short time constraint and has location constraints within which to sell the asset.
What determines liquidation price? ›
The price is calculated by looking at the loss that can be sustained in the account and what price movement for the assets would trigger such a loss.
What is an example of a liquidation price? ›
Liquidation Example
A trader goes long 1 contract at $100.00, with a liquidation price of $99.50 and a bankruptcy price of $99.00. The trader is liquidated and the trading engine places a limit sell order with a limit price of $99.00 (the bankruptcy price). The liquidation order is filled at $99.25.
How do you calculate liquidation ratio? ›
Current Ratio = Current Assets / Current Liabilities
The current ratio is the simplest liquidity ratio to calculate and interpret. Anyone can easily find the current assets and current liabilities line items on a company's balance sheet.
What is the liquidation value of a fund? ›
Liquidation value in investing is the value that would be left over to distribute to shareholders if a firm were to close its business, sell off its assets one by one, then cover its financial obligations prior to the common stock.
