WFU Law School
Law & Valuation
5.1.2 Adjusted Book Value

5.1.3 Liquidation (or Salvage) Value

Liquidation 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 real estate.

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 separately.

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 1344 (1973).

5.1.2 Adjusted Book Value

©2003 Professor Alan R. Palmiter

This page was last updated on: April 5, 2004