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
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.
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.
More valuation methods