Liquidation Value

The value of a business under a rapid sale process.

What is Liquidation Value?

Liquidation value is an estimation of the final value which 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 when it’s on the brink of bankruptcy and tangible assets are sold quickly, often for pennies on the dollar, for an extremely low percentage. However, when an investor uses to exit a profitable venture, the value of the company 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 properties.

Calculation Example:

Unlimited Ltd. listed a market capitalization of $500 million in the stock exchange, the company has liabilities totaling $150 million and a book value of $400 million. The appraiser estimates the value of company’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.