Definition: Liquidation value is the aggregated worth of a company’s asset after it becomes bankrupted or dissolved under distressful circumstances. The term commonly refers to the value of a company that is going out of business.
What Does Liquidation Value Mean?
The price established for the assets of certain company varies depending on the situation where the business is at. An ongoing business, one that is currently producing profits and enjoys financial stability, will be priced differently (usually superiorly) than a business that is almost bankrupted.
The latter does not have the ability to continue operating in the open market, and therefore its assets are valued at a lower rate, since an individual asset sold separately will always worth less than the sum of the assets of a profitable business. When companies are submitted to liquidation processes, the purpose of such procedures is to clear any outstanding liabilities, either with banks, suppliers, investors or any other creditor.
In order to do so, all properties belonging to the company are sold, normally through an auction, and the proceeds obtained are employed to cover for such commitments, while the remaining funds, if any, are distributed among shareholders, according to the portion of the company they currently possess. Therefore, the liquidation value is frequently calculated as the aggregated worth of all the physical assets of the company, minus the sum of all its current short and long term liabilities.
Example
Office Experts LLC was an exclusive distributor of a brand called PaperEx. The company operated successfully for five years, but due to several administrative mishandlings it became financially unstable and, after a sudden drop in revenues, the company was no longer able to fulfill its financial commitments and was therefore declared bankrupted.
The bankruptcy court assigned three designated liquidators to oversee the process and according to their analysis the company’s assets had a potential liquidation value of $32 million, and its total estimated liabilities were $28.5 million. Therefore its liquidation value, for shareholders, is around $3.5 million, after paying for all the outstanding debt.
