The liquidation value is calculated in order to estimate the amount of money left after the sale of all the assets and the repayment of the liabilities by the company. All tangible, fixed and current assets are taken into account when calculating the liquidation of company company value. However, intangible assets such as goodwill are not included in the same.
Importance of calculating the liquidation value of the company
Liquidation value is generally used for bankruptcy purposes. It is also used when a company plans to merge, put itself up for sale, or seek credit from its investors or debtors.
The different types of business liquidation
Orderly liquidation: in this case, the liquidators have an equitable period and is done with the joint agreement of the owners and the shareholder. Orderly liquidation can occur when a key person in a company resigns or if shareholders vote against the company and decide not to pursue any further dealings with the company.
Forced liquidation: when the company’s performance falls below margin levels and eventually goes through a rapid liquidation process. This can be done voluntarily or by the court. This type of liquidation takes place in a short period of time.
Learn more: What Creditors Need to Know About Liquidating a Company in the UAE.
Methods of calculating the net asset value of the company
There are generally four methods of valuing business assets: Each method provides a way to rank the overall value of assets. The liquidation value formula is particularly important in bankruptcy.
Market value: It represents the value of a company according to the current market price. While market value is a term that represents the price an asset would enter the market
Book value: book value is the value of the asset as it appears on the balance sheet.
Liquidation value: this is generally lower than book value but higher than salvage value. The assets continue to have value, but they are sold at a loss because they must be sold quickly.
Salvage value: the salvage value is the value given to an asset at the end of its useful life; in other words, it is the scrap value.
How to calculate the net asset value of a company?
Liquidation value is calculated from assets such as real estate, fixtures, equipment, and inventory owned by a business. Intangible assets (such as goodwill, corporate intellectual property, and brand recognition), however, are not factored into the liquidation value of a business.
Liquidation value can be calculated by removing the value of all of a company’s assets and liabilities from its financial report. Subtracting the liabilities from the assets will give investors the liquidation value.
The net asset value is calculated as follows:
- Obtain a copy of the latest annual report.
- List a company’s assets and liabilities. where assets refer to the full range of assets held by a company and liabilities represent the debt incurred by the company to purchase those assets.
- Determine the expected liquidation value. This is done by subtracting the company’s liabilities from its assets.
Factors affecting the liquidation value of the company
There are a number of facts that affect the liquidation value of an asset
- Liquidation period: it takes a reasonable amount of time to get the best possible price. So, if a company is looking for a quick liquidation, the liquidation value will be much lower than the current value.
- Changes in business operations: in order to survive in the market, every company with financial difficulties tries to cut the coat and change the management of the mint operation. This can have a negative impact on the liquidation value
- Asset performance: The liquidation value of a company going out of business tends to attract higher bidders given its broader scope. Partial liquidation often raises questions about the performance of assets in the discussion, which negatively impacts the total liquidation value.
Farahat & co is made up of the main liquidators in the country. We can walk you through the process of calculating liquidation value step by step. Our specialized and expert team thoroughly investigates the case and executes the value calculation process smoothly. For more advice, contact us.