Liquidation Value - Explained
What is Liquidation Value?
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Table of ContentsWhat is Liquidation Value?How Does Liquidation Value Work?Example of Liquidation Value
What is Liquidation Value?
To liquidate is to sell off something to create cash (an easily traded or liquid asset). Liquidation helps to value organizational assets when the business is closed down and every business activity is dissolved. Liquidation value includes all types of company assets, including machinery, real estate, or any unnamed assets. Upon liquidation, the division of assets takes place based upon the priority of claim to those assets. Priority is another word for seniority. Liquidation value is generally much lower when assets are sold in a short period of time. This is often called a fire sale..
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How Does Liquidation Value Work?
The process of liquidation valuation shows a great difference between the original price of company assets and the reduced price on which the assets are sold in an open market. This process is also known as the auction of assets price. The company assets are sold by giving a certain time period instead of instant cash. The period can consist of months and even years. In case of a forced sale, the organization receives significantly reduced price for its assets. Liquidation value process involves an estimation of an overall amount of organizational assets. Under given rules are required to be observed during the selling process.
- The client is responsible to specify a time period and the sale will take place in that period.
- The process of selling will take place under present market conditions or principals.
- The buyer has complete knowledge and awareness of the process.
- The seller will follow certain bounds to sell assets.
- The motivational aspect os required from buyers side and no sign of force.
- The buyer will act according to his interests
- There is a time limitation for selling and marketing efforts
- Payments would be settled in cash using US dollars, however other financial arrangements are also acceptable.
The real estimation of assets (liquidation) is significant in terms of organizational capital budget. If an organization realizes that the undertaken project is not profitable and there are no likely chances of its changing into profitability then it is better to liquidate it. Liquidation price estimates are lower however it is more comparing with salvage value. There is no doubt that the prices of assets keep on increasing but time constraint the assets are sold on reduced price. Nonphysical assets are not part of the liquidation process. However, intangible assets are part of the liquidation.
Example of Liquidation Value
Liquidation show value difference of assets and company liabilities. For example, liabilities of an organization are $110,000 while company assets worth $2 million on the balance sheet. Hence, total $100000 is salvage value. In this case, all the assets will be auctioned at 75% of the price. The value calculation for all these assets also includes subtracting of liabilities from the total auctioned amount.