Understanding Liquidation Value

What Is Liquidation Value?

The liquidation value of a business is the net value of its physical assets, should these need to be sold because the firm has to cease trading.

Typical examples of such tangible assets are property, stock, fixtures and fittings, cash, vehicles, machinery, and other equipment. After debts are paid, creditors are due any available proceeds. 

The liquidation value will typically be lower than if the business or assets were otherwise sold. A buyer of any assets may be aware of the urgent need for sale and offer less than market value. Selling assets separately rather than the business as a whole may also lead to lower proceeds.

Directors of a potentially insolvent business must exercise care when trying to sell assets or the business at deeply discounted amounts, especially to any persons or entities connected with the directors. This can create the risk of liability for transactions at an undervalue. Caution and professional advice are strongly recommended.

Please do contact us for experienced, confidential help.

How is a Liquidation Value Calculated?

A total valuation of all the physical assets will be made with debts and liabilities subtracted from this. Intangible assets are not included as part of the liquidation value – they are things like patents, brands and the business reputation, so where there is no physical presence. 

Is Liquidation Value the Same as Market Valuation?

No – the liquidation value is generally lower than the market (or going concern) value, because the assets generally need to be realised without delay and this results in lower prices. The market valuation is usually the highest valuation placed on a business.

Although the liquidator will seek to place the best valuation they can on an asset, they will be working to timescales. So, this can mean there is less time to find more specialist buyers who would pay higher prices or for extended marketing of the assets.   

How does Liquidation Value Compare to net Asset Valuation?

The net asset valuation (sometimes called the book valuation) is based on the value of assets as listed on the balance sheet. It should also show how the historical cost and this can allow investors to see any appreciation or depreciation. It is often below the market valuation, but above the liquidation valuation.

How Does the Liquidation Valuation Compare to Salvage Valuation?

Some assets may be of no useful purpose and so the liquidator is only able to place a salvage valuation on them, meaning their scrap price. This figure will typically be below the liquidation valuation.

Liquidation Values will be Priced to Sell

Broadly, the valuations placed on assets to be liquidated will be conservative and this is why such sales can mean bargains for buyers – think about when a retail outlet closes on the high street, and “everything must go”. One example was the chain of department stores, Debenhams, which went into liquidation in December 2020 and sought to sell off much of its stock at 70% off recommended prices.

Could my Assets be Sold at a Loss?

Because the liquidator needs to collect funds as quickly during the process, the assets may be sold at a loss and so at under their market value.

Can I Buy Back my Assets?

The key aim of a liquidation is to close the business in an orderly manner and to repay creditors. However, former directors or owners may be planning to set up another business and so would like to take possession of their old assets to help with this.

In the case of a business that is to be liquidated, directors should tread carefully. If they seek to buy back assets before a liquidator is appointed and at a low price, this could fall foul of insolvency rules and mean that potentially, creditors could receive less than could be owing to them.. But if a liquidator has been appointed, then the directors may be given the go ahead to make an approach and to buy back assets at an agreed fair value price.

Do you Have Questions about Liquidation Valuations? 

If you are considering liquidating your business, we know this can be an exceptionally challenging time and you may have many questions. As specialists in the field, our experts are on hand to discuss your options in confidence, via live chat, phone or email.