Liquidation Value

Liquidation value is the total worth of a company's physical assets when it goes out of business or if it were to go out of business. Liquidation value is determined by assets such as real estate, fixtures, equipment and inventory. Intangible assets are not included in a company's liquidation value.

There are generally four levels of valuation for business assets: market value, book value, liquidation value, and salvage value. Each level of value provides a way for accountants and analysts to classify the aggregate value of assets. Liquidation value is especially important for those that work with bankruptcies and workouts.

Market value is generally the highest value of assets, though it could be lower than book value if the value of the assets has gone down in value due to market demand rather than business use.

The book value is the value of the asset as listed on the balance sheet. The balance sheet lists assets at the historical cost, so the value of assets may be higher or lower than market prices. In an economic environment with rising prices, the book value of assets is lower than the market value.

The liquidation value is the expected value of the asset once it has been liquidated or sold, presumably at a loss to historical cost.

Finally, the salvage value is the value given to an asset at the end of its useful life; in other words, this is the scrap value.

Liquidation value is usually lower than book value but greater than salvage value. The assets continue to have value but, due to a limited time frame, must be sold at a loss to book value.

Liquidation value does not include intangible assets. Intangible assets include a business's intellectual property, goodwill, and brand recognition. However, if a company is sold rather than liquidated, both liquidation value and intangible assets are considered to determine the company's going-concern value. Value investors look at the difference between a company's market capitalization and its going-concern value to determine whether the company's stock is currently a good buy.

Liquidation is the difference between some value of tangible assets and liabilities. As an example, assume liabilities for company A are $550,000. Also assume the book value of assets found on the balance sheet is $1 million, the salvage value is $50,000, and the estimated value of selling all assets at auction is $750,000, or 75 cents on the dollar. The liquidation value is calculated by subtracting liabilities from the auction value, which is $750,000 minus $550,000, or $200,000.