The Quick Value of a Firm or an Asset

Liquidation Value

Summary/Abstract

Liquidation literally means turning a business's assets into readily available cash.

The Liquidation Value (LV) is the estimated amount of money that an asset or company could quickly be sold for, such as if it were to go out of business. In a normal growing profitable industry, a company's liquidation value is usually much less than the current share price. In a dying industry, the liquidation value may exceed the current share price. This usually means that the company should go out of business.

There are actually two types of LV, depending on the time available for the liquidation process:

1. Orderly liquidation value. This assumes that the enterprise can afford to sell its assets to the highest bidder. It assumes an orderly sale process. It assumes that the seller can take a reasonable amount of time to sell each asset in its appropriate season and through channels of sale and distribution that fetch the highest price reasonably available.
 

2. Distress liquidation value. This is an 'emergency' price. This assumes that the enterprise must sell all its assets at or near the same time, to one or more purchasers. The assumption is that the typical purchaser for the assets is a dealer who specializes in the liquidation of the entire assets of a company. For obvious reasons, the Distress LV will always be lower than the Orderly LV.

Depending on the enterprise and the nature of its assets, the difference between the two values can be substantial. This methodology should only be used if liquidation is likely at the end of the forecast period.

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