What Does Liquidation Value Mean?
Liquidation value is the value of all the assets owned by a company when it is no longer a going concern. It also means the amount of money that can be collected when the assets of a company are sold, with an aim to meet the final obligations of the organization. This value presumes that the seller will sell all the assets of the organization as quickly as possible, even if they are below the existing market value.
Divestopedia Explains Liquidation Value
Liquidation value is an important measure taken into account by potential investors before they invest money in an organization. This is because they want to know what happens to their money and how much of it will be returned in the worst case scenario under a bankruptcy situation. This value is also of particular interest to creditors, shareholders and bondholders.
To calculate the liquidation value, the liabilities are subtracted from the assets. The existing assets will be first used to meet the debt obligations of the company. The remaining amount, if any, is shared among investors of a private company based on the ratio of their investment. In the event where the assets are insufficient to meet the debt obligations, then the existing assets are sold, even at rates that are lower than the market value, so that one or more creditors are paid off. The investors get nothing in this scenario.