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Liquidation Value Definition
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”..
A Little More on What is Liquidation Value
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.
References for Liquidation Value
Academic Research for Liquidation Value
Explaining the variation in REIT capital structure: the role of asset liquidation value, Giambona, E., Harding, J. P., & Sirmans, C. F. (2008). Real Estate Economics, 36(1), 111-137. This paper examines the results of the hypothesis made by Shleifer-Vishny as this hypothesis shows a significant influence of liquidation values on debt maturity and firm leverage. Panel data has been used on REITs indicates that any organization that has high liquid assets, also it follows similar patterns in leverage as well as in maturities. For REITs, leverage is considered a substitute for maturity.
Restart. com: Identifying, Securing and Maximizing the Liquidation Value of Cyber-Assets in Bankruptcy Proceedings, Chertok, M., & Agin, W. E. (2000). Inst. L. Rev., 8, 255. In this review paper, the writer examines different ways to identify and secure the highest level of liquidation value in relation to cyber assets in bankruptcy hearings.
On Optimization of dividend flow for a company in a presence of liquidation value, Boguslavskaya, E. (2003). http://www. boguslavsky. net/fin/dividendflow. Pdf. The writer uses a mathematical model of calculation to evaluate the rate of bankruptcy, value, salvage value of organizational assets. This also includes the role of the regular discount rate, dividends that were paid out while the organization’s equals existed.
Fair Market Value in the Tax Law: Replacement Value or Liquidation Value, Goldberg, D. S. (1981). Tex. L. Rev., 60, 833. This paper sheds light on the role of fair market value in the context of tax law and the role of liquidation value that sometimes is assumed as replacement value.
Real assets, liquidation value and choice of financing, Liu, C. H., Liu, P., & Zhang, Z. (2016). This paper examines the role of using real estate organizations to identify liquidation value and how this impact on organizational financial choices. Real estate firms examine every type of assets and their value. The research also highlights the role of using debt and equity because debt increases asset quality. The observations suggest that organizations are highly dependent on real-estate market prices.
Loan payment and renegotiation: The role of the liquidation value, Paliński, A. (2013). This paper highlights the conceptual framework of loan payments and renegotiation processes while returning loans. In such scenarios, the borrower makes little payments similar to liquidation value as these details also exist in credit agreements. The paper sheds light on using Monte Carlo framework to identify the scale of the interest rate on commercial loans.
Optimal dividend and reinsurance strategies with financing and liquidation value, Yao, D., Yang, H., & Wang, R. (2016). The Journal of the IAA, 46(2), 365-399. The study proposes insurance portfolio in the context of optimal financing dividend distribution and reinsurance. The role of a manager is significance to reduce the surplus with the purchase of proportional reinsurance and with efforts to raise money. The risk model highlights liquidation values in case of bankruptcy. The value of an insurance company can increase if an insurer uses a stochastic framework. The financing option should be considered only when costs are little. In situations when surplus increases less reinsurance should be bought by implementing barrier strategy.
The relationship between fixed asset liquidation value and market capitalization, Lockridge, T. M., Saunders, G., & Sridharan, U. (2009). Journal of Business & Economics Research, 7(3), 31-40. The paper evaluates the relationship between fixed assets of a company and the scope of market capitalization in the context of liquidation values. The study reveals the book value of organizational fixed assets and compares it to market capitalization scope as it is helpful in decision-making procedures.
The Secured Creditor’s Right to Full Liquidation Value in Corporate Reorganization, Jacobson, M. D. (1974). U. Chi. L. Rev., 42, 510. The review paper evaluates the secured creditors’ rights in relation to full liquidation value. The study also presents arguments on principles of corporate reorganization.
General financial market model defined by a liquidation value process, Lepinette, E., & Tran, T. (2016). Stochastics, 88(3), 437-459. The research paper investigates a financial market framework proposed by Kabanov and Schachermayer. Transaction expenditures are similar to trade asset in the context of exchange volumes. Solvency set is not important if fixed costs, as well as costs of the proportional transaction, are present. The research observes that it is less appropriate to use HB (Hahn-Banach) separation theorem in relation to high claim prices. The research shows that in arbitrage opportunity absence organization or countries make high price claims as is the high price claim case between EU and US because there is no presence of arbitrage opportunity of any other kind.