Liquidation ValueA company's net value should it undergo liquidation proceedings

Under the law, corporations are treated as separate entities from their owners.

However, since a corporation isn’t a human being, it is not a natural person.

That means that it won’t have the same birth and death that a natural person would experience.

Rather, a corporation “dies” when it undergoes full liquidation.

From the point of view of the corporation, this “death” is unavoidable so long as it has the resources to maintain its operations.

This is why you can find corporations that are already several hundred years old.

Just take a look at one of the biggest corporations in the world, the Coca-Cola Company.

As of the date of this article’s publication, the Coca-Cola Company is 130 years old. And it’s not even the oldest!

With that said, a corporation may still “die” due to particular circumstances.

It could be that the corporation is bankrupt and has to shut down.

Or it could be at the discretion of the management.

Or it could be the case that the owners want to close down the corporation.

In all of these cases though, the corporation will have to undergo liquidation proceedings before it becomes officially “dead”.

When a corporation undergoes liquidation, it will typically have to sell its assets to have the cash to pay its creditors.

Since the assets are usually sold in a rush or at a limited time, the corporation is more likely to receive less than it would have if it had unlimited time to sell them.

We refer to the amount that the corporation undergoing liquidation would receive as the liquidation value.

In this article, we will be exploring what liquidation value is.

How does one calculate a corporation’s liquidation value?

Does it have any use outside of liquidation proceedings?

Let’s find out.

What is Liquidation Value?

Liquidation value refers to the net value of a company’s assets should it undergo liquidation proceedings.

It is an estimation of the value that a company will receive under a rapid sale process.

Typically, only tangible assets such as inventory, machinery, equipment, etc. count towards a company’s liquidation value.

Intangible assets such as goodwill, patents, copyright, etc. don’t count.

The reason behind this is that intangible assets are difficult to put value on.

Aside from that, they often only have value within the business as a going concern.

A business undergoing liquidation is no longer a going concern.

Liquidation value may also refer to the value of shares when put up for sale should an investor choose to exit a profitable venture.

In a typical liquidation scenario, a company will have to sell its assets immediately in order to quickly settle its obligations.

Immediately usually means within a six to twelve-month period, though there are some cases where the timeframe is much shorter (e.g. one day).

Because of this short period, the company will usually have to sell its assets at a discount.

This means that it will most likely receive less than the actual value of its assets.

For example, it may only receive $0.50 for every $1 of asset value.

In addition, the company will most likely not receive any payment for its intangible assets.

Outside of liquidation proceedings, liquidation value may also be useful for a company that is undergoing a merger, applying for credit, or putting itself up for sale.

For a company putting up itself for sale, its liquidation value plus its intangible assets determine its going-concern value.

Value investors may also use a company’s liquidation value to gauge whether or not it’s a worthy investment.

The Four Levels of Valuation For Business Assets

There are four levels of valuation for business assets (five if you include adjusted book value): market value, book value, liquidation value, and salvage value.

Of these four, the market value provides the highest level of valuation of assets, while salvage value provides the lowest.

Market value refers to the valuation of assets in an open market.

Provided that prices are rising, market value will also provide the highest asset valuation.

In some cases though, the market value may be lower than the book value due to the general market conditions.

For example, an asset may become obsolete due to the release of a better model.

Thus, the asset will most likely have minimal to no market value at all.

Book value refers to the value of assets that you can find on a company’s balance sheet.

It is usually the historical cost of the assets (i.e. cost of the asset when it was acquired).

Because of this, it tends to be lower than the market value (especially real estate).

The book value is primarily useful for accounting.

For business valuation, the market value and liquidation value are more suitable.

Salvage value refers to the value of assets when they become fully depreciated.

We can also refer to it as the scrap value.

A company’s liquidation value is usually lower than its market value and book value but higher than its salvage value.

The reason behind this is that the company has to sell its assets in rush, which results in selling such assets at a discount.

In some cases, an asset’s liquidation value may be greater than its book value.

This is usually the case for assets that are subject to accelerated depreciation.

Calculating Liquidation Value

To calculate a company’s liquidation value, we first need to gather the estimated amount that the company will receive for selling its tangible assets.

Do not include intangible assets in the calculation.

Next, subtract the company debts and liabilities from the estimated amount.

That should get us the company’s liquidation value.

In most cases, a company’s liquidation value will be lower than its book value.

This is because the company has to sell its assets in a rush.

Additionally, if a company has lots of intangible assets, its liquidation value will be significantly lower.

For example, let’s say that Company A has total debt of $370,0000.

According to its balance sheet, it has a total of $750,000 in assets.

Analysts estimate that should company A undergo liquidation, it should be able to sell its assets for $520,000 (approx. $0.69 per $1).

From this information, we can gather that the company’s liquidation value is $150,000 ($520,000 – $370,000).