Liquidation value is the estimated value of a property if it were to be sold immediately. There are two types of liquidation values: distressed or forced, and orderly. Skilled accountants can estimate liquidation value, which is usually below fair market value. Companies may be forced to liquidate if the liquidation value exceeds the share price. Estimating liquidation value can be challenging, especially for unique assets.
Liquidation value is the estimated value that would be received upon liquidating a property. Individuals can apply liquidation values to real estate, businesses, 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 estimates of value.
In the case of a distressed or forced liquidation value, the estimate is arrived at by determining how much the property would recover if it were sold immediately. In this case, it is assumed 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 where they must sell at the distressed liquidation value.
Orderly liquidation value, on the other hand, refers to the value that could be realized by selling assets in an orderly and organized manner. In this case, the seller still needs to settle, but it can be done over time, not right away. 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 the liquidation is putting 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, and the profits will be distributed to the shareholders. Companies may be forced to do so, since their first duty is to their shareholders. Rarely, price fluctuations are due to poor valuation, and companies always check the value before taking the move to liquidate for this reason. Companies can also file for bankruptcy protection, with the goal of having the opportunity to change the value of the company before closing and liquidating.
Estimating liquidation value can be challenging, especially with unique assets. Some assets are illiquid by nature and therefore can be significantly devalued if they need to be liquidated, because there is not enough time to negotiate better prices. Other assets are so rare that it is difficult to determine how much they would sell for in liquidation. A team of accountants may be involved in the valuation 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 bad valuation could hurt shareholders.
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