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 encompasses the value of company real estate, fixtures, equipment, and inventory, but excludes intangible assets like intellectual property and brand recognition.
Key Insights
- Liquidation value represents the total worth of a company’s tangible assets if liquidated.
- Assets such as real estate, fixtures, equipment, and inventory are included in liquidation value; intangible assets are excluded.
- Typically, liquidation value is lower than book value but higher than salvage value.
- Assets are frequently sold at a loss during liquidation to gather cash quickly.
Deep Dive Into Liquidation Value
Business asset valuation can be classified into four main levels: market value, book value, liquidation value, and salvage value. Realizing the importance of liquidation value is especially crucial during bankruptcies and complex financial restructurings.
Intangible assets, like intellectual property and brand goodwill, are not considered in the liquidation value. However, if a company is being sold rather than liquidated, these intangible assets alongside the liquidation value together determine the company’s going-concern value. Value investors focus on the difference between a company’s market capitalization and its going-concern value to evaluate investment opportunities.
Each asset is assessed on its recovery rate when listed for liquidation. For example, cash has a 100% recovery rate, whereas accounts receivable, inventory, and plant equipment typically recover less. These rates are aggregated to estimate a company’s potential recovery value in a liquidation scenario. Potential investors consider this value to gauge the return on their funds in case of bankruptcy.
Market vs. Book vs. Liquidation vs. Salvage Value
Market value generally offers the highest asset valuation, though it may drop below book value if market demand impacts it negatively. Book value, represented on the balance sheet at historical costs, may differ from market values, particularly in an inflationary environment. Liquidation value is the anticipated value of assets sold under expedited conditions and often results in a lower return than the historical cost. Finally, salvage value is the residual worth of an asset at the end of its useful life.
Liquidation values are typically lower than book values but greater than salvage values. For example, Payless, known for discount footwear, declared bankruptcy in February 2019 and shut down all its U.S. and Puerto Rico stores, exemplifying the practical application of liquidation value valuations.
Practical Example of Liquidation
Let’s unpack an example to comprehend liquidation value in real-life scenarios. Imagine company A, with $550,000 in liabilities. Assume the balance sheet indicates the book value of assets is $1 million, and the salvage value is $50,000. If the estimated auction value of selling all assets is $750,000, the liquidation value can be calculated by subtracting the liabilities from the auction value—$750,000 minus $550,000 equals a $200,000 liquidation value.
Related Terms: market value, book value, salvage value, intangible assets, bankruptcy, asset liquidation, estimated recovery value.
