What Is Liquidation Value?
Let me explain liquidation value directly to you: it's the net value you'd get from a company's physical assets if the business shut down and everything was sold off. We're talking about real estate, fixtures, equipment, and inventory here. Intangible assets? They're out of the picture entirely in this calculation.
Understanding Liquidation Value
You should know there are four main levels for valuing business assets: market value, book value, liquidation value, and salvage value. Each one helps accountants and analysts figure out the total asset worth. Liquidation value becomes crucial in bankruptcies or workouts.
Remember, liquidation value skips intangible assets like intellectual property, goodwill, and brand recognition. But if a company gets sold instead of liquidated, both liquidation value and those intangibles factor into the going-concern value. As a value investor, you'd look at the gap between market capitalization and going-concern value to decide if the stock is a smart buy.
Not every asset sells for its original price or what's still owed on it. Businesses evaluate recovery rates per asset. Cash recovers 100%, but accounts receivable, inventory, and equipment recover less. Add those up, and you get an estimated recovery value for liquidation.
Important Note for Investors
If you're a potential investor, you'll want to check a company's liquidation value before putting money in. It tells you how much of your investment might come back if bankruptcy hits.
Market vs. Book vs. Liquidation vs. Salvage
Market value often gives the highest asset valuation, though it could dip below book value if market demand drops, not just from business use.
Book value is what's on the balance sheet at historical cost, so it might be higher or lower than current market prices. In rising price environments, book value sits below market value. Liquidation value is what you'd expect from selling the asset quickly, usually at a loss from historical cost.
Salvage value is the scrap value at the end of an asset's useful life. Liquidation value typically lands below book value but above salvage value because assets still hold some value, but the quick sale means losses.
Fast Fact
Take Payless, the discount footwear company: it filed for bankruptcy in February 2019 and, despite having 3,400 outlets in 40 countries, announced closures of all U.S. and Puerto Rico locations.
Example of a Liquidation
Liquidation boils down to tangible assets minus liabilities. Say Company A has $550,000 in liabilities. Its balance sheet shows $1 million in asset book value, salvage value at $50,000, and auction sale estimate at $750,000—or 75 cents on the dollar. Subtract liabilities from that auction value: $750,000 minus $550,000 equals $200,000 in liquidation value.
Key Takeaways
- Liquidation value is the total worth of a company's physical assets if sold during business closure.
- It includes assets like real estate, fixtures, equipment, and inventory, but excludes intangibles.
- This value is usually lower than book value but greater than salvage value.
- Assets sell at a loss in liquidation to raise cash quickly.
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