Liquidation Value

Quick Summary of Liquidation Value

Liquidation value is the estimated price shareholders would receive in the event a company goes out of business.

The liquidation value of a company is an estimate of the value of a company’s assets if all assets were sold for cash. There are two types of liquidation value. Distressed liquidation value is the “fire sale” scenario, when all assets are sold with urgency nearly simultaneously, perhaps to dealers who specialize in selling assets in a more ordered manner. In contrast, ordered liquidation value is the value expected from proceeds of patiently selling each asset according to timing and approach that are best for that asset. Ordered liquidation value is generally much more than distressed liquidation value. Public companies in collapsing industries and other seriously underperforming entities sometimes have a liquidation value exceeding market capitalization. In such cases, the right solution is to sell the company’s assets and give the shareholders the liquidation proceeds. One well-known risk arbitrage strategy based upon liquidation value is to buy such shares and wait for the sale of proceeds.

Liquidation value differs from book value in that book value usually lists assets at the lower of cost or market or in the case of machinery at depreciated value. Going concern value is often based on some multiple of earnings. Book value is based on the cost of assets. Liquidation value goes the next step and attempts to estimate the current market value of assets if they were sold.

In the event of bankruptcy, liquidation value minus outstanding debts gives a better estimate of funds likely to be available to shareholders.

Related Phrases

Cite Term

Definition Sources