Liquidation Value

Liquidation value is the amount that would be realised from a liquidation and sale of all assets. It assumes that the company is not continued, but broken up. It is usually below the value of a going concern.

It is determined by valuing individual assets at their achievable sale prices, deducting the costs of winding up and taking account of all liabilities including social plans, severance, dismantling and disposal obligations. Time pressure is decisive: an orderly sale over several months achieves considerably higher prices than a rapid disposal, which is why a distinction is regularly drawn between orderly liquidation value and forced liquidation value. The gap between the two is substantial, particularly for specialised machinery that finds few buyers outside its intended use.

Liquidation value matters practically in three contexts. First, it forms the floor of valuation, because no owner should sell a business below its break-up value. Where earnings value falls below it, continuing operations is economically questionable. Second, in distress and restructuring it is the benchmark creditors use when deciding whether to support a restructuring plan. Third, it plays a role in lending, because it determines the value of collateral on enforcement.

Distinguishing between asset classes is essential, because marketable land, vehicles and standard machinery are comparatively realisable while specialised equipment, work in progress and intangibles often fetch a fraction of book value. Goodwill disappears entirely. The costs of winding up itself must also be reflected, meaning personnel, rent, administration and dismantling during the realisation period, which reduce proceeds further. For buyers in special situations the measure is the starting point of every negotiation, because no creditor agrees to a solution that leaves it worse off than a break-up.