Liquidation value
Liquidation value is the amount, net of relevant costs such as preparation and disposal, that would be realized if a business is terminated and its assets are sold. CBV Institute defines it that way and separates an orderly sale from a forced one.
Liquidation value answers a different question from a going-concern price: what the assets would bring if the business stopped. The Canada Revenue Agency’s Information Circular 89-3 says the fair market value of a business is generally the greater of its liquidation value and its going concern value. BDC subtracts liabilities from the amount the assets could sell for in a liquidation sale, less liquidation expenses.
Orderly and forced
CBV Institute defines orderly liquidation value as a sale over a reasonable period of market exposure, and forced liquidation value as a sale with less than that. BDC notes that some banks may collateralize equipment based on its forced liquidation value, so a lender’s figure can rest on the harsher basis. The asset-based valuation entry covers the wider method, and business valuation methods compared places it beside the others.
What to check or ask
- Whether a quoted figure assumes an orderly or a forced sale
- Which preparation and disposal costs were deducted
- Whether liabilities were subtracted, and which ones
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01CBV InstituteIndustryPractice Bulletin No. 2: International Valuation Glossary – Business Valuation
- 02Canada Revenue AgencyGovernmentPolicy Statement on Business Equity Valuations
- 03Business Development Bank of CanadaGovernmentBusiness acquisitions: How to value a company
- 04Business Development Bank of CanadaGovernmentEquipment valuation: How to do it
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