Liquidation Value

Liquidation value assumes the business will not continue. Instead, its assets, such as property, equipment, inventory and receivables, are sold separately, and the proceeds are used to pay creditors.

Assets usually sell for less in a liquidation than their value to a running business. Buyers know the seller is under pressure, specialised equipment may have few buyers, and inventory may need deep discounts.

For example, a manufacturer's equipment recorded at 4 million might fetch only 1.5 million at auction, and its inventory worth 2 million might sell for 1 million. If its total liquidation proceeds are 5 million and it owes 7 million, creditors would recover only part of what they are owed and shareholders would receive nothing.

Liquidation value is often considered a floor for a company's value. If a business is worth more as a going concern than in liquidation, it makes sense to keep it running or sell it as a whole. Lenders consider liquidation value when deciding how much to lend against a company's assets.