Liquidation Value
Liquidation value is the estimated net amount that would be realized from selling a company’s tangible assets—such as cash, inventory, equipment, fixtures, and real estate—after paying liabilities, typically under a quick or forced sale (for example, during bankruptcy). It excludes intangible assets like goodwill, patents, trademarks, and brand value.
Why it matters
- Provides a floor value for equity holders and a reference for creditors during bankruptcy or restructuring.
- Helps investors assess downside risk: comparing market capitalization to liquidation value indicates how much protection creditors or shareholders might have if the business fails.
- Guides lenders, turnaround specialists, and insolvency practitioners in estimating recoveries.
What is excluded
- Intangible assets (intellectual property, goodwill, brand recognition).
- Going-concern premiums (value derived from ongoing operations, customer relationships, or synergies).
How it differs from other valuations
- Market value — often the highest, reflecting what buyers would pay in normal conditions.
- Book value — historical cost minus accumulated depreciation as recorded on the balance sheet; can be higher or lower than market value.
- Salvage value — the minimal scrap value at the end of an asset’s useful life.
Liquidation value typically falls below book and market value but above salvage value because assets are sold quickly and often at a discount to usual selling prices.
How liquidation value is estimated
- Itemize tangible assets and estimate realistic recovery rates for each class:
- Cash — typically 100% recovery.
- Accounts receivable — discounted for collectability.
- Inventory — may be sold at markdowns, especially if obsolete.
- Equipment and real estate — auction or forced-sale discounts.
- Sum the estimated proceeds from selling all tangible assets.
- Subtract liabilities (secured and unsecured as applicable).
- The result is the estimated liquidation value (positive or negative).
Formula:
Estimated liquidation value = Estimated proceeds from tangible asset sales − Liabilities
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Example
Assume a company has:
* Estimated auction proceeds for tangible assets: $750,000
* Liabilities: $550,000
Liquidation value = $750,000 − $550,000 = $200,000
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If liabilities exceed asset proceeds, liquidation value can be zero or negative (no residual value to equity holders).
Practical considerations
- Recovery rates vary by asset type, market conditions, geographic market, and the speed of the sale.
- Secured creditors may have priority claims on specific assets; unsecured creditors and equity holders receive remaining proceeds in order of legal priority.
- Forced sales (auctions, rapid liquidations) often produce lower prices than managed sales over time.
- Going-concern sales (selling the business intact) can capture intangible value not reflected in liquidation estimates.
Use by investors and stakeholders
- Investors use liquidation value to evaluate downside protection before buying equity, particularly for distressed or capital-intensive firms.
- Lenders and restructuring professionals use it to model likely recoveries and set expectations for negotiations.
- Management may compare liquidation value to going-concern value when considering sale, restructuring, or shutdown.
Key takeaways
- Liquidation value measures the net proceeds from selling a company’s tangible assets quickly, after paying liabilities.
- It excludes intangible assets and typically lies below book and market values but above salvage value.
- Estimation requires realistic recovery rates by asset class and attention to creditor priority.
- Comparing market capitalization or going-concern value to liquidation value helps assess downside risk in distressed situations.