What is liquidation approach?
The liquidation approach is a method of business valuation. It measures the total worth of a company’s physical assets that could potentially be sold if it were to be liquidated in the immediate future rather than run as a going concern. Valuations may be affected by the timescale in which a liquidation would be assumed to occur.
Where have you heard about liquidation approach?
Whenever the economy is going through a bad patch, such as the 2008 global crisis, you hear talk of companies facing liquidation. A liquidation approach is useful for firms on the brink of bankruptcy to see how much they're worth.
What you need to know about liquidation approach.
The liquidation approach values a company on the basis of what it would be worth if its assets were to be liquidated, in other words turned into cash. The liquidation approach is often used when a business knows it is no longer a going concern and has to sell off assets. Shareholders get paid only after the company’s debts and other liabilities have been settled.
However, the assumed speed of the liquidation can affect the value arrived at by using this approach, because a company undergoing a more orderly liquidation could expect to earn some extra income while being wound up, whereas one undergoing a near-immediate liquidation would not.
The liquidation approach need not necessarily be used to value a company in trouble - it can be applied to any business, including a going concern whose owners want to know what it would be worth.