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. Liquidation value is the value of company real estate, fixtures, equipment, and inventory. Intangible assets are excluded from the liquidation value of a company.
The central theses
- Liquidation value is the total value of a company’s physical assets if it were to go out of business and sell its assets.
- Liquidation value determines a company’s assets such as real estate, fixtures, equipment, and inventory. Intangible assets are excluded from the liquidation value of a company.
- Liquidation value is usually lower than book value but higher than salvage value.
- During liquidation, assets are sold at a loss as the seller must collect as much cash as possible in a short amount of time.
Understand liquidation value
There are basically four valuation levels for business assets: market value, book value, liquidation value and residual value. Each level of value provides accountants and analysts with a way to classify the overall value of assets. Liquidation value is particularly important in bankruptcies and liquidations.
Liquidation value does not include intangible assets such as a company’s intellectual property, goodwill and brand awareness. However, when a business is sold and not liquidated, both the liquidation value and the intangible assets determine the going concern value of the business. Value investors look at the difference between a company’s market cap and its enterprise value to determine if the company’s stock is a good buy right now.
Potential investors will assess a company’s liquidation value before investing. Investors want to know how much of their money would be returned in the event of bankruptcy.
Market vs Book vs Liquidation vs Residual Value
Market value typically provides the highest valuation of assets, although the metric could be lower than book value if the assets’ value has decreased due to market demand rather than business use.
Book value is the value of the asset as it appears on the balance sheet. Assets are presented on the balance sheet at 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. Liquidation value is the expected value of the asset after it has been liquidated or sold, expected to be at a loss at cost.
Finally, 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 higher than salvage value. The assets continue to have value but are sold at a loss because they need to be sold quickly.
Discount shoe company Payless filed for bankruptcy in February 2019. Although the company once had 3,400 stores in 40 countries, the company announced it would close all of its US and Puerto Rico locations.
Example of a liquidation
Liquidation is the difference between a certain value of property, plant and equipment and liabilities. As an example, assume that Company A’s liabilities are $550,000. Also assume that the book value of the assets on the balance sheet is $1 million, the salvage value is $50,000, and the estimated value of selling all the 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.