Companies terminating their business operations while exiting from the market or due to bankruptcy adopt liquidation to pay their creditors and shareholders. Liquidation value is the estimated price that can be drawn from selling its tangible assets that include inventories and real estate owned by the firm. Read on as this short article brings out the complete picture of the liquidation value.
Different facets of liquidation
- Voluntary Liquidation: In this case, the liquidation is given a fair amount of time and is done with the joint consent of the owners and shareholders giving way to higher proceeds from the sale of assets. A situation of this sort may arise when the company is heading to a termination or when it has lost its credibility with the shareholders.
- Forced Liquidation: Performance of company accounts below margin levels end up going through this process of quick liquidation. This may be done voluntarily or via court-appointed liquidator for the proceedings to discharge its liabilities. These liquidations happen within short time spans. In such situations, the offered price may be way below the current value of liquidated assets.
Factors Affecting Liquidation Value
Liquidation value in most cases does not match the current asset value. There are a number of factors that determine the market price for the liquidating assets. In this section, we discuss a few primary factors that contribute to the market value.
- Liquidation Time Frame: It takes a reasonable duration to get the best possible price. So if a firm is looking at quick liquidation, the liquidation value will be much less than the current value in the market.
- Changes to Business Operations: In a bid to survive in the market, every sinking business tries its hand on cost cutting and change in management and operations. This can have an adverse effect on the liquidation value.
- Trends: Every section of the business has a period of the year which sees the maximum profits. So if the liquidated assets are in demand, the price offered will be competitive considering that more than a couple of individuals will be interested in the purchase.
- Type of Project: Larger projects with wider scope tend to get higher bids considering its future benefits.
- The Finality Factor: Liquidation value of a company that is shutting down operations tends to get higher bidders considering its larger scope. Partial liquidation often raises questions on the performance of the assets in the discussion leading to a negative impact on the whole liquidation value.
- Advertising Liquidation: Advertising, your assets in liquidation, creates awareness and also attracts potential buyers increasing the scope of an auction and improving your final price.
Calculation of liquidation value
The genuineness of the liabilities and value of the assets form the first level of liquidation calculation. Liquidation value is the estimated sum of money left after all the liabilities are paid off from the sale of assets. Business analysts calculate this figure keeping all the affecting factors and the market trend.