Liquidation Value: why it might be the best Valuation Technique

Liquidation value is the worst case assessment that defines the net value of a company’s physical assets. In this assessment, only the tangible assets are taken into account, and are done in case if it were to go out of business and assets are sold.

The liquidation value is the value of the company which includes real estate, fixtures, equipment, and inventory. Liquidation value is used to determine any company’s intrinsic value which is considered lower than book value but greater than salvage value. It is not that the assets do not have value but the assets continue to have value and are sold at a loss to sell quickly. Liquidation value is used when a healthy company undergoes a merger, puts itself up for sale, or applies for credit.

Calculating the Liquidation Value: 

The liquidation value is determined by a qualified professional in the field of appraisers. They will provide the correct information and an estimate with which a business can establish when it seems like closing up. It is determined through tangible assets like fixtures, real estate, equipment, and inventory owned by a particular company.

The calculation process includes the following steps:

  • From the latest annual report prepare the balance sheet of the company. 
  • Find out the list of current assets and liabilities of the company. Assets refer to the complete range of assets owned by a company and liabilities denote the debt taken on by the company to purchase these assets.
  • Find the market value of all the tangible assets of the company which are taken into consideration for this method. 
  • Now, to determine the expected liquidation value you need to subtract the company’s liabilities from its assets.

Net-net Working capital:

Net working capital is used to determine the company’s ability to pay off the debts. It is calculated by subtracting the company’s current assets (cash, account receivable, unpaid bills, inventories of raw materials and finished goods) with current liabilities (accounts payable, payable taxes, wages, and the long-term debt). It is calculated by the difference between the current assets and current liabilities of the company to meet the short term expenses. Net operating working capital is the difference in debt owed to and debt owed by the company. For the growth of the company, it must have more current assets than current liabilities. 

Net-net is a term used for a company that is less than the difference between the company’s current assets and total liabilities. It focuses on current assets, taking cash and cash equivalents at full value, then reducing accounts receivable for doubtful accounts, and reducing inventories to liquidation values. Net-net value is calculated by subtracting the liabilities from the adjusted current assets. 

Why it is the best Valuation Technique?

While taking into consideration the liquidation value of companies, financial books from the past few years should be taken into account. Moreover, it is necessary to check out the functions and relationships that the company shares with its employees, competitors, and suppliers. 

This valuation technique provides business or company owners with the information they might require. Moreover, the liquidation value method is used by potential lenders to establish the business’s credit-worthiness for any future capital. Essentially, liquidation value is of worth and is used when a creditor’s position or priority needs to be determined or estimated.

It can be useful when the business owner is looking for a better price via liquidation rather than a future income or free cash flow based method. Now the business has time to generate and maximize the incomes for its assets via liquidation. 

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