What Does Liquidation Approach Mean?
The liquidation approach is one of the primary business valuation methods available. It is used when the company is determined to no longer be a going concern and liquidating the assets would yield a higher value than the present value of its future earnings and cash flow potential. The final after-tax proceeds available from a liquidation approach requires that all assets and liabilities in a balance sheet be assessed. The net realizable value of the assets minus their disposition costs must first be estimated.
Divestopedia Explains Liquidation Approach
The liquidation approach is primarily about time. If the business is in default of any of its financial obligations, the bankers pull the trigger on a forced liquidation. In this case, there is very little time, so you have to assume an immediate shutdown of operations and sale of the assets. A more likely situation may be that the business is not in duress and simply fetches a better price via liquidation rather than a future income or free cash flow based method, and then we are dealing with an orderly liquidation. In this case, the business has time to maximize the proceeds for its assets via liquidation. More importantly, the business can still generate income while its orderly liquidation is occurring, and this income also needs to be taken into consideration when estimating value. An orderly liquidation is definitely the more advantageous business valuation method if the business is not a going concern.