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Liquidation Value

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The liquidation value of a company is an estimate of the value of a company's assets if all assets were sold for cash. There are two types of liquidation value. Distressed liquidation value is the "fire sale" scenario, when all assets are sold with urgency nearly simultaneously, perhaps to dealers who specialize in selling assets in a more ordered manner. In contrast, ordered liquidation value is the value expected from proceeds of patiently selling each asset according to timing and approach that are best for that asset. Ordered liquidation value is generally much more than distressed liquidation value. Public companies in collapsing industries and other seriously underperforming entities sometimes have a liquidation value exceeding market capitalization. In such cases, the right solution is to sell the company's assets and give the shareholders the liquidation proceeds. One well-known risk arbitrage strategy based upon liquidation value is to buy such shares and wait for the sale of proceeds.



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