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 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 international department 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 together a bid to keep the company going while it restructured itself, but those efforts did not materialize into a plan that would have allowed the chain to continue… ‘I am satisfied that there is no other viable alternative,’ Justice Glenn Hainey said.”