Liquidation value

What the assets would realise if the business stopped operating and everything were sold, after settling what is owed.

Example

Equipment, stock and unpaid invoices realised in an orderly sale, less every liability, gives the floor beneath any going-concern valuation.

Important

It is usually the lowest of the methods and that is what makes it useful: every other method assumes the business keeps working, and this is the only one that prices the case where it does not.

Related terms

• Book value — The value of a business, or of an individual asset, as carried on the balance sheet - historical cost less accumulated depreciation, rather than any market estimate.
• Margin of safety — The gap between what you pay and the value you believe an asset has - deliberate room for the estimate to be wrong.
• Balance sheet — A statement of everything a business owns and everything it owes at one specific moment. What is left after subtracting the second from the first belongs to the owners.

Lessons that explain it

• Selling early means accepting a discount; a wind-down usually means preferences take what is left — A secondary sale can return cash before a company exits, typically below the latest valuation. When a company winds down, creditors and preferences are paid first, and common holders commonly receive nothing. (11 min)
• What each method is for, and what to do when they disagree — Three methods on one asset produce three different answers, and the disagreement is the most useful output. Averaging it away destroys the only thing the exercise produced. (10 min)

All 578 terms in the Investing glossary