What is Liquidation Value?

Liquidation value is the estimated value which would be received by liquidating a piece of property. People can apply liquidation values to real estate, companies, and other types of assets. As a general rule, the liquidation value is below the fair market value. Skilled accountants can estimate liquidation value and provide other value estimations.

In the case of a distressed or force liquidation value, the estimate is arrived at by determining how much the property would fetch if it was sold immediately. In this case, the assumption is that the seller needs to liquidate quickly, and cannot afford to wait for a fair market price. This is usually the worst value for the property, and most sellers try to avoid being forced into a situation in which they must sell at the distressed liquidation value.

Orderly liquidation value, on the other hand, refers to the value which could be obtained by selling off assets in an orderly and organized fashion. In this case, the seller still needs to liquidate, but it can be done over time, not immediately. This price is usually better because it assumes that some strategy can be used during the sale. However, it is still below fair market value, thanks to the pressure which liquidation puts on the seller.

In the case of a company, if the liquidation value exceeds the share price, it is an indicator that the company should be liquidated, with the proceeds being distributed to the shareholders. Companies can be compelled to do so, since their first duty is to their shareholders. Rarely, the variance in pricing is caused by misvaluing, and companies always verify the value before taking the step of liquidating for this reason. Companies may also file for bankruptcy protection, with the goal of having an opportunity to turn the company's value around before closing and liquidating.

Estimating liquidation value can be challenging, especially with unique assets. Some assets are illiquid by nature, and thus can be devalued significantly if they need to be liquidated, because there is not enough time to negotiate better pricing. Other assets are so unusual that it is difficult to determine how much they would sell for in the event of a liquidation. A team of accountants may be involved in the valuing process, with the goal of ensuring the most accurate and fair estimate possible. This is especially important in the case of a publicly traded company, where a poor valuation could hurt shareholders.