Liquidation Based Valuation Flashcards
(CFA Institute) The value of a company if it were dissolved and its assets are sold individually.
Liquidation Value
It represents the net amount that can be gathered if the business is shut down and its assets are sold piecemeal.
Liquidation Value
Also known as liquidation value.
Net Asset Value
The base price or the floor price for any firm valuation exercise.
Liquidation Value
Situations to consider liquidation value:
- Business Failures
- Corporate or Project End of Life
- Depletion of Scarce Resources
The most common reason why businesses close or liquidate.
Business Failures
This happens when a company cannot pay liabilities as they come due.
Insolvency
The most serious type of business failure as this happens when liabilities become greater than asset balance.
Bankruptcy
Internal factors that drive business failures:
- Mismanagement
- Poor financial evaluation and decisions
- Failure to execute strategic plans
- Inadequate cash flow planning
- Failure to manage working capital
External factors that would attribute to business failure:
- Severe economic down-turn
- Dynamic consumer preferences
- Material adverse governmental action or regulation
- Occurrence of natural disasters or calamities
- Occurrence of pandemic or general health hazards
The most conservative valuation approach among all as it considers the realizable value of the asset if it is sold now based on current conditions.
Liquidation Value
General concepts considered in liquidation value:
- If the liquidation value is above income approach valuation (based on going-concern principle) and liquidation comes into consideration, liquidation value should be used.
- If the nature of the business implies limited lifetime, the terminal value must be based on liquidation. All costs necessary to close the operations should also be factored in and deducted to arrive at the liquidation value.
- Non-operating assets should be valued by liquidation method as the market value is reduced by costs of sales and taxes. Since they are not part of the firm’s operating activities, it might be inappropriate to use the same going concern valuation method technique used for business operations. If such result is higher than net present value of cash flows from operating the asset, the liquidation value should be used.
- Liquidation valuation must be used if the business continuity is depended on current management that will not stay.
Assets are sold strategically over an orderly period to attract and generate the most money for the assets.
Orderly Liquidation
This liquidation process will expose assets for sale on the open market, with a reasonable time allowed to find a purchaser, both buyer and seller having knowledge of the uses and purposes to which the asset is adapted and for which it is capable of being used, the seller being compelled to sell and the buyer being willing, but not compelled, to buy.
Orderly Liquidation
Liquidation process, at which the assets are sold as quickly as possible, such as at an auction.
Forced Liquidation
