value is the amount that would be received
if the company actually sold all of its
assets, for their market value, and paid all its
liabilities (including preferred stock). The remaining
money, if distributed to shareholders, represents
the firm's liquidation value per share.
Critique of liquidation value. Although
liquidation value reflects the market value of
the company's assets, it fails to capture the
earning potential (future returns) of the company's
business. For example, a start-up software company
may own a few desks and computers, but its earnings
power (cash flow potential) could well exceed
the market value of these assets. The value of
a firm, like any investment, is usually found
in its potential to produce future financial returns
-- liquidation of its assets usually does not
capture this value.
Use of liquidation value. But
sometimes a company's liquidation value exceeds
its total stock market value -- as when a company
has valuable assets that are being mismanaged.
If a company's stock price is depressed, the liquidation
value of its assets may exceed its market price.
If the firm's assets can be sold at prices that
exceed price to purchase the firm, a bust-up
transaction makes sense.
In addition, many small business that are consistently
unprofitable may be "worth more dead than
alive." In this case, liquidation value can
be ascertained by machinery and equipment appraisers
and real estate appraisers. Some of this information
is available on the Internet: residential
Even if a whole business is being acquired, liquidation
value is relevant in valuing the firm by providing
a floor (or minimum value) of the company's
present value. At the very least, a business is
worth what its assets could be sold for.
[reference to buying oil on Wall Street]
Liquidation value might also be relevant if the
purchaser of a business is interested only in
certain income-producing assets.
Example: In 1989 when Kohlberg, Kravis &
Roberts purchased RJR Nabisco, KKR did not have
an interest in retaining and operating all these
assets. Their value became their liquidation
value -- how much those assets could be sold
Liquidation of goodwill
A liquidation valuation assumes that all the
assets of the business will be sold and the debts
paid. This approach will often be urged upon the
court by solo practitioners who take the position
that without them, their businesses have little
value except for tangible assets.
Only a minority of courts have adopted the view
that goodwill should not be considered in valuing
a professional practice, and North Carolina is
squarely in the majority, which considers goodwill
a divisible asset. See Annotation, Accountability
for Good Will of Professional Practice in Actions
Arising from Divorce or Separation, 52 A.L.R.3d