ELE 2 –

Valuation Concepts and

Methodologies

BSA 3-1
Week 3 November 17, 2021

Liquidation Based
Valuation
 LIQUIDATION BASED VALUATION

Learning Objectives:

1.Differentiate the valuation

2.Describe the going concern and liquidation concern asset based
3.Illustrate the capitalizing and discounted future
Liquidation Value refers to the value of a company if it were dissolved
and its assets are sold individually. Liquidation value represents the
amount that can be gathered if the business is shut down and its
assets are sold piecemeal. In some texts, liquidation value is also
known as net asset value.
Liquidation value is the base price or the floor price for any firm
valuation exercise. Liquidation value should not be used to value
profitable or growing companies as this approach does not consider
growth prospects of the business.

Liquidation prices can be difficult to obtain as these are not readily

available. Instead, liquidation value should be used for dying or losing
companies where liquidation is imminent to check whether profits can
still be realized upon sale of the assets owned.
 
Situations to consider Liquidation Value
1. Business failures;
2. Corporate or Project End of Life; and
3. Depletion of scarce resources
General Principles on Liquidation Value
Liquidation value is the most conservative valuation approach among all as it
considers the realizable value of the asset if it is sold now based on current conditions.

• If the liquidation value is above income approach valuation and liquidation

comes into consideration, liquidation value should be used.
• If the nature of the business implies limited lifetime, the terminal value must
be based on liquidation. All cost necessary to close the operations should
also be factored in and deducted to arrive at the liquidation value.
General Principles on Liquidation Value
Liquidation value is the most conservative valuation approach among all as it
considers the realizable value of the asset if it is sold now based on current conditions.
• Non-operating assets should be valued by liquidation method as the market
value is reduced by costs of sale and taxes. Since they are not part of the
firm’s operating activities, it might be inappropriate to use the same going
concern valuation technique used for business operations. If such result is
higher than net present value of cash-flows from operating the asset, the
liquidation value should be used.
• Liquidation valuation must be used if the business continuity is dependent on
current management that will not stay.
Types of Liquidation

• Orderly liquidation – Assets are sold strategically over an orderly

period to attract and generate the most money for the assets.
• Forced liquidation – Asset/s are sold as quickly as possible, such
as at an auction.
Calculating Liquidation Value
• Liquidation value considers the present value of the sums that can be
obtained through disposal of the assets of the firm in the most appropriate
way, net of the sums set aside for the closure costs, repayment of the debts
and settlement of all liabilities, and net of the tax charges related to the
transaction and the costs of the process of liquidation itself.

Formula:
Present Value of sale of asset P xx
Less: PV of Cost for termination and settlement for liabilities (xx)
Less: PV of Tax Charges for Transaction and other liquidation costs (xx)
Liquidation Value P xx
Date Activity
November 17 Discussion – Chapter 3
November 19 Practical Activity (afternoon) – Coverage Chapter 2&3
November 24 Discussion – Chapter 4
November 26 Continuation Discussion – Chapter 4 (morning)
Practical Activity (afternoon) coverage Chapter 4
December 1 Midterm exam – Chapter 1 to 4
December 3 Discussion – Chapter 5
December 8 Quiz – Coverage Chapter 5
December 10 Practical Activity – Chapter 5
December 14 Discussion of Chapter 6
December 15 Quiz – Chapter 6
December 17 Notes: Summary Chapter 1 to 6 – Reading materials
January 5 Practical Activity – Chapter 6
January 7 Final Examination – Chapter 5 and Chapter 6
Question?