Liquidation Value

10-K

What is the liquidation value?

The liquidation value is the total value of the physical assets of a company in the event of cessation of activity and of the assets sold. The liquidation value is the value of the real estate, fixtures, equipment and stocks of the business. Intangible assets are excluded from the liquidation value of a business.

Understanding the liquidation value

There are generally four levels of valuation of business assets: market value, book value, liquidation value and salvage value. Each value level allows accountants and analysts to classify the overall value of assets. The liquidation value is particularly important in the event of bankruptcy and training.

Prospective investors will assess the liquidation value of a business before investing. Investors want to know how much of their funds would be returned in bankruptcy.

Market against book against liquidation against recovery

Market value generally provides the highest valuation of assets, although the measure may be lower than book value if the value of assets has decreased due to market demand rather than commercial use.

The book value is the value of the asset as it appears on the balance sheet. The balance sheet lists assets at historical cost, so that the value of the assets may be higher or lower than market prices. In an economic environment where prices are rising, the book value of the assets is lower than the market value. The liquidation value is the expected value of the asset once it has been liquidated or sold, probably at a loss compared to the historical cost.

Finally, the salvage value is the value given to an asset at the end of its useful life; in other words, it’s the scrap value.

Discount shoe company Payless filed for bankruptcy in February 2019. Although it once owned 3,400 outlets in 40 countries, the company has announced that it will close all of its sites in the United States and Porto. Rico.

Liquidation value

The liquidation value is generally lower than the book value but higher than the salvage value. Assets continue to have value, but are sold at a loss because they must be sold quickly.

The liquidation value does not include intangible assets such as the intellectual property of a company, goodwill and brand recognition. However, if a business is sold rather than liquidated, the liquidation value and intangible assets determine the going concern value of the business. Value investors examine the difference between a company’s market capitalization and its going concern value to determine if the company’s stocks are currently a good buy.

Key points to remember

  • The liquidation value is the total value of the physical assets of a company in the event of cessation of activity and sale of its assets.
  • The liquidation value is determined by the assets of a business, such as real estate, fixtures, equipment and inventory. Intangible assets are excluded from the liquidation value of a business.
  • The liquidation value is generally lower than the book value, but higher than the salvage value.
  • The assets are sold at a loss during liquidation because the seller must collect as much money as possible within a short time.

Example of liquidation

Liquidation is the difference between a certain value of tangible assets and liabilities. For example, suppose Company A’s liabilities are $ 550,000. Suppose also 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 the sale of all 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.

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