What is the liquidation value?

The net worth of a company’s tangible assets if it were to liquidate and sell its holdings is known as its liquidation value. The liquidation value is the value of the company’s inventory, fixtures, equipment, and real estate. The liquidation value of a corporation does not include intangible assets.

Understanding

Business assets are typically valued at four levels: market value, book value, liquidation value, and salvage value. Analysts and accountants can categorize the total asset value using each level of value. Particular importance is given to liquidation value in bankruptcy and workout situations.

Intangible assets such as a company’s goodwill, intellectual property, and brand recognition are not included in the liquidation valuation. On the other hand, if a company chooses to sell itself rather than liquidate it, the liquidation value and intangible assets determine its going concern value. When evaluating whether a company’s stock is intelligent, value investors compare its market capitalization to its going-concern value.

Comparison of Market, Book, Liquidation, and Salvage

Market value usually yields the highest asset valuation. However, if market demand, rather than business use, is to blame for the asset’s decline in value, the measure may be lower than book value.

The balance sheet shows that the asset’s value is its book value. Since assets are listed on the balance sheet at their historical cost, they may differ from market values. The book value of assets is less than their market worth in a rising price environment. The asset’s predicted worth after it has been sold or liquidated, most likely at a loss relative to its historical cost, is known as the liquidation value.

Lastly, the value assigned to an item after its useful life is known as the salvage value or junk value.

Generally speaking, the liquidation value is higher than the salvage value but lower than the book value. The assets are sold at a loss even though they still have worth since they have to be gone immediately.

Illustration of a Liquidation

The discrepancy between the value of some tangible assets and obligations is known as liquidation. Let’s take an example where business A has $550,000 in liabilities. Assume, furthermore, that the assets listed on the balance sheet have a book value of $1 million, a salvage value of $50,000, and an estimated value of $750,000, or 75 cents on the dollar, from selling all the assets at auction. The liquidation value is determined by deducting the auction value ($200,000) from the liabilities ($750,000 – $550,000).

Conclusion

• The overall value of a company’s physical assets if it went out of business and its assets were sold is known as liquidation value.
• The liquidation value of a firm is determined by its assets, which include real estate, fixtures, equipment, and inventory. Intangible assets are not included in the liquidation value of a corporation.
• The liquidation value is typically less than the book value but more significant than the salvage value.
• During liquidation, assets are sold at a loss since the seller needs as much cash as possible quickly.