What Does Forced Liquidation Value (FLV) Mean?
Forced liquidation value (FLV) is the amount of money that a company will receive if it sold its assets in an auction immediately. The idea behind this forced liquidation value is to get an estimate of the financial position of the company in the worst possible situation and circumstance. It is based on the assumption that the business will sell its assets in the quickest time possible, which will usually lead to a low price.
Divestopedia Explains Forced Liquidation Value (FLV)
The FLV is calculated by an appraiser who takes each asset and estimates its value on the assumption that the asset is sold in an auction within 60 to 90 days after it is advertised. The value of all the assets are then added together to arrive at the forced liquidation value of the business.
There are many hidden assumptions to the computation of forced liquidation value. Firstly, this value assumes that the buyers are responsible for paying the costs of moving the asset from the seller's premises. Secondly, the costs incurred for the liquidation process are not taken into account, though some appraisers may calculate the net liquidation value after deducting the costs related to this process. However, computing the liquidation costs is a lengthy task by itself as it entails an in-depth analysis of the liquidation process and its circumstances for the business. Due to these factors, the forced liquidation value of the company can sometimes be less than 25 percent of its fair market value. Hence, this value is mainly used for financial metrics.
For more realistic estimates, other valuation methods are used to assess the fair market value of assets at the time of liquidation. Out of these methods, the orderly liquidation value (OLV) is popular as it estimates the value of assets if they were liquidated over a period of six to nine months. As a result, this value is closer to the market value of assets and tends to be higher than the forced liquidation value.