# Liquidation Value Explained: Definition, Exclusions, and Examples

![Liquidation Value](https://www.investopedia.com/thmb/5LurjZGV2uQ0UyFhfgPtk9VWz9Y=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-l-liquidation-value_Final-fc7689ba91444249a5a82e3ce1bc62c8.png)

*— Investopedia / Ryan Oakley*

## What Is Liquidation Value?

Liquidation value is the net worth of a company's physical assets, like real estate, fixtures, equipment, and inventory, during bankruptcy. It does not include intangible assets. Potential investors consider liquidation value when making investment decisions.

### Key Takeaways

*   Liquidation value is the net worth of a company's physical assets if it went out of business.
*   Intangible assets like intellectual property are not included in liquidation value.
*   Liquidation value is usually lower than book value but higher than salvage value.
*   Investors evaluate liquidation value to know potential returns in case of bankruptcy.
*   Asset recovery rates vary; cash may have a higher rate compared to inventory or equipment.

## Exploring the Importance of Liquidation Value

Business asset valuation generally includes four levels: market, book, liquidation, and [salvage value](https://www.investopedia.com/terms/s/salvagevalue.asp). Each level of value provides a way for accountants and analysts to classify the aggregate value of assets. Liquidation value is especially important in the case of bankruptcies and [workouts](https://www.investopedia.com/terms/w/workout-agreement.asp).

Liquidation value excludes [intangible assets](https://www.investopedia.com/terms/i/intangibleasset.asp) like intellectual property, goodwill, and brand recognition. If a company is sold, not liquidated, its going-concern value includes both liquidation value and intangible assets. Value investors compare market capitalization with going-concern value to decide if a stock is a good buy.

Not every asset can be sold for what was paid for it or what is still due on the note to buy that asset. Businesses look at the recovery rate on an asset-by-asset basis. Cash would have a 100% recovery rate. Accounts receivable, inventory, and plant equipment would have a lower recovery rate. These rates tallied together will provide an [estimated recovery value](https://www.investopedia.com/terms/e/estimated-recovery-value-erv.asp) of a company in case of liquidation.

> **Important**
>
> Potential investors will assess the liquidation value of a company before investing. Investors want to know how much of their funds would be returned in the event of bankruptcy.

## Comparing Different Asset Valuations: Market, Book, Liquidation, and Salvage

Market value typically provides the highest valuation of assets although the measure could be lower than book value if the value of the assets has decreased due to market demand rather than business use.

The book value is the value of the asset as listed on the balance sheet. The balance sheet lists assets at the historical cost, so the value of assets may be higher or lower than market prices. In an economic environment with rising prices, the book value of assets is lower than the market value. The liquidation value is the expected value of the asset once it has been liquidated or sold, presumably at a loss to historical cost.

Finally, the salvage value is the value given to an asset at the end of its [useful life](https://www.investopedia.com/terms/u/usefullife.asp); in other words, this is the scrap value.

Liquidation value is typically less than book value but more than salvage value. The assets continue to have value, but they are sold at a loss because they must be sold quickly.

> **Fast Fact**
>
> Discount footwear company, Payless, filed for bankruptcy in February 2019. Despite once owning 3,400 outlets in 40 countries, the company announced it would close all of its U.S. and Puerto Rico locations.

## Calculating Liquidation Value: A Real-World Example

[Liquidation](https://www.investopedia.com/terms/l/liquidation.asp) is the difference between some value of [tangible assets](https://www.investopedia.com/terms/t/tangibleasset.asp) and liabilities. As an example, assume liabilities for company A are $550,000. Also, assume the book value of assets found on the balance sheet is $1 million, the salvage value is $50,000, and the estimated value of selling all assets at auction is $750,000, or 75 cents on the dollar. The liquidation value is calculated by subtracting the liabilities from the auction value, which is $750,000 minus $550,000, or $200,000.