When a company faces financial distress or decides to wind down its operations, understanding the liquidation value of its assets becomes crucial. This is where a Liquidation Value Calculator comes into play. Uncover the steps to effectively use a Liquidation Value Calculator, ensuring you can make informed decisions during challenging times.
Liquidation Value Calculator: How Do I Use it?
A Liquidation Value Calculator is an online software application used to determine the total value of a company’s assets if the firm were to be sold. Here are the steps on how to use a Liquidation Value Calculator:
Gather Financial Data
From the firm’s balance sheet, locate total assets and total liabilities. These are the inputs you will use to calculate the firm’s liquidation value. The liquidation value is the estimated residual dollar proceeds available after all the assets of a company have been sold (liquidated) and all debts and liabilities have been paid.
Liquidation Asset Values Estimation
To reflect a distressed sale market value, assign a value percentage to individual assets:
- Cash – Cash always has a market value of 100%.
- Accounts Receivable (A/R) – Adjust for potential default and assign 70% – 90% of the current balance.
- Inventory (Inv) – Account for oscillating demand and obsolescence. A 50% to 80% discounted value of the current balance is a conservative guesstimation.
- Fixed Assets – Plant, property, and equipment (PP&E) are a company’s fixed assets and should be discounted by 30% - 70% to adjust for marketability and depreciation.
- Intangible Assets – The firm’s patents, trademarks, and goodwill are discounted 0 – 20%. These assets are harder to value and often are hard to sell.
Liabilities are always valued at the current balance plus any additional obligations, due at the time of sale, must be included in the total liability balance.
Liquidation Value Calculation
Sum the adjusted values of all the assets then subtract the value of the total liabilities to calculate the company’s liquidation value:
Liquidation Value = (Cash x 100%) + (Accounts Receivable x A/R percentage) + (Inventory x Inv percentage) + (Fixed Assets x Fixed Assets percentage) + (Intangible Assets x Intangible Assets percentage) – (Total Liabilities)
Is the Liquidation Value typically Higher than the Market Value?
No, the liquidation value is not typically higher than the market value, and here’s why:
Distressed Sale – Liquidating companies are often in a distressed situation. The pool of potential buyers may be small because of the limited market for the specialized assets up for sale.
Time is of the Essence - Due to their immediate need for cash, assets are sold at distressed prices generating lower sales proceeds.
Limited Market Exposure – The announcement and consummation of a liquidation sale is a finite event because of the urgent demand for cash. The announcement may not reach a wider audience, resulting in fewer bids and lower prices.
Buyer’s Market – Buyers understand the selling firm is under pressure to make a sale, and thus is not negotiating from a position of strength. This asymmetry tips leverage in the buyer’s favor to negotiate lower prices.
While liquidation and market value aim to provide an estimate of what an asset might sell for, the conditions under which they are calculated lead to significant differences. The fair market value is typically higher because it assumes a normal selling environment, whereas the liquidation value accounts for the need to sell quickly, often at a reduced price.
By using a Liquidation Value Calculator, businesses can better understand the potential financial outcomes of liquidating their assets, ensuring they are prepared for any financial challenges they may face.
Read next: What Happens to Stock after Liquidation?
