Liquidation value is calculated in order to estimate the amount of money left after all the assets are sold and the company has paid off the liabilities. All tangible assets, fixed as well as current are considered while calculating the company liquidation value of the company. However, intangible assets such as goodwill are not included in the same.
Significance of company liquidation value calculation
The liquidation value is generally used for the purpose of bankruptcies. It is also used when a company considers undergoing a merger, putting itself up for sale, or applying for credit from its investors or debtor.
Different types of company liquidation
Orderly liquidation: in this case, the liquidators are given the fair amount of time and is done with the joint consent of the owners and shareholder. Orderly liquidation may occur when some important person of a company resigns or if the shareholders vote against the company, and decide not to continue any operation further with the company.
Forced liquidation: when the performance of the company is below margin levels and ends up the going through a process of quick liquidation. This may be done voluntary or by the court. This kind of liquidation is conducted within a short time span.
Methods used for calculating company liquidation value
There are generally four methods of valuation for business assets: Each method provides a way to classify the aggregate value of assets. Liquidation value formula is especially important in the case of bankruptcies.
Market value: It represents the value of a company according to the current market price. While market value is a term that represents the price, an asset would get in the marketplace
Book value: the book value is the value of the asset as listed on the balance sheet.
Liquidation value: this is usually lower than book value but greater than salvage value. The assets continue to have value, but they are sold at a loss because they must be sold quickly.
Salvage value: 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.
How to Calculate Liquidation Value of a Company?
Liquidation value is calculated through assets like real estate, fixtures, equipment, and inventory owned by a company. Intangible assets (like goodwill, business’ intellectual property, and brand recognition) are, however, not counted in the liquidation value of a company.
Liquidation value can be calculated by removing the value of all assets and liabilities of a company from its financial report. The subtraction of liabilities from assets will give investors the liquidation value.
The liquidation value is calculated as follows:
- Obtaining a copy of the latest annual report.
- Determining the list of assets and liabilities of a company. where assets refer to the complete range of assets owned by a company and liabilities represent the debt taken by the company to purchase these assets.
- Determine the expected liquidation value. This is done by subtracting the company’s liabilities from its assets.
Factors Affecting the Company Liquidation Value
There are a number of facts that affect the liquidating value of an asset
- Liquidation timeframe: it takes a reasonable duration to get the best possible price.so if a firm is looking for quick liquidation the liquidation value will be much less than the current value.
- Changes to business operation: in order to survive in the market every business with financial difficulties tries for coat cutting and change in manage mint operation. This can have an adverse impact on liquidation value
- Performance of assets: Liquidation value of a company that is shutting down operations tends to get higher bidders considering its larger scope. Partial liquidation often raises questions on the performance of the assets in the discussion leading to a negative impact on the whole liquidation value.
Farahat & co are comprised of leading liquidators in the country. We can guide you through step by step process of liquidation value calculation. Our specialized and expert team deeply investigates the case and executes the value calculation process smoothly. For further consultation contact us.