What is liquidation value?

Liquidation value is an important measure taken into account by potential investors before they invest money in an organization.
This is because they want to know what happens to their money and how much of it will be returned in the worst case scenario under a bankruptcy situation.

The liquidation value is notably different from the book value,as assets with no book value may still have a liquidation value. This is common with assets that are expensed or subject to accelerated depreciation.
Further,assets of the company may appreciate,the value of which is not accounted for on the companys books. This is common with real estate assets.

The liquidation value method is similar to the adjusted book value method in that it provides a market value for the assets of the business.The difference in these methods is that liquidation value provides an additional context to the valuation.

Liquidation Value approach
Liquidation value is estimated through assets like fixtures, real estate, 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.

The liquidation value is calculated as follows:
1.Get a copy of the latest annual report.This report can be requested by contacting the Investor Relations department of the company. Besides,it can also be downloaded directly from the website of the company.

2.Find the line item assets and liabilities where assets refer to the complete range of assets owned by a company and liabilities represent the debt taken on by the company to purchase these assets.

3.Determine the expected liquidation value.This is done by subtracting the company's liabilities from its assets.

To conclude with,the liquidation value presumes that the sale is carried out by a seller who is compelled to sell and presumes an exposure period which is lesser than the market norms.