What is Liquidation Value?
The Short Answer
Liquidation Value explained simply
Liquidation value is what a business’s assets would be worth if they were sold off individually and quickly, often under pressure. This is different from the value of a business as a going concern, which assumes the business will continue to operate and generate profits. When a business is liquidated, assets like inventory, equipment, and property are sold off to generate cash, usually at a discount because of the urgency of the sale. This value is often considered a "floor" for a business’s worth, especially in distressed situations.
Real-World Example
The Failing Bookstore Scenario
Imagine a bookstore that is struggling and needs to close down. The owner decides to liquidate the business. They sell off all the books, shelves, cash registers, and other fixtures. Because they need to sell everything quickly, they might offer significant discounts. The total cash generated from these quick sales, after accounting for any selling costs, would be the liquidation value of the bookstore.
Why this matters
Understanding liquidation value is important because it provides a baseline for what a business’s assets are worth in a worst-case scenario. For buyers, it can represent the minimum value they might pay, especially if they are considering buying a distressed business for its assets. For sellers, it helps them understand the absolute lowest amount they might recover if their business cannot continue operating.
Liquidation value is usually much lower than what a business is worth if it’s operating well. Don’t confuse the two. A healthy business has value beyond just its physical assets.
Liquidation value is usually much lower than what a business is worth if it’s operating well. Don’t confuse the two. A healthy business has value beyond just its physical assets.
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