Valuation Concepts and
Methods
Joyce A. Bauan, RCA, MICB
LIQUIDATION BASED VALUATION
According to the CFA Institute, refers to the value of a company if it were dissolved
and its assets are sold individually
Use as alternative approach if there will be circumstances that occur which doubts
the going-concern ability of a business
LIQUIDATION VALUE
Represents the net amount that can be gathered if the business is shut down and its
assets are sold piecemeal
Also known as net asset value
May erode based on the time frame available for liquidating assets
Base price or the floor price for any firm valuation exercise
Should not be used to value profitable or growing companies as this approach does
not consider growth prospects of the business
+Once a business closes, synergies generated by assets working together
or by applying managerial skill to these assets are lost which reduces
firm value.
+If liquidation value becomes higher compared against going concern
value, this may signal that a significant business event transpire which
makes liquidation value more appropriate in valuation exercise.
+A unique call out for liquidation value is if the firm is operating under a
proprietorship or a partnership model. In these two forms of
organization, profits and cash flows are highly dependent on the skills,
knowledge and ability or network of the owner or partners.
+Liquidation value should consider valuing separately the goodwill
attributed to these partner-specific qualities as this may not reflect the
true value of the assets which will be sold or transferred. In this scenario
where liquidation is the motive, goodwill will reduce liquidation value.
Situations to Consider Liquidation Value
1. Business Failures
o Most common reason why business close/liquidate
o Insolvency happen when company cannot pay liabilities as they come due.
Asset > Liabilities (having liquidity problems)
o Bankruptcy is the most serious type of business failures
Asset< Liabilities (shareholder’s equity becomes negative balance)
+ The firm cannot settle all its liabilities unless the assets can be sold at a higher price than
its book value
Internal Factors of Business Failures:
1. Mismanagement
2. Poor financial evaluation and decisions
3. Failure to execute strategic planning
4. Failure manage working capital
External Factors of Business Failures:
5. Severe economic down-turn
6. Dynamic consumer preferences
7. Material adverse governmental action or regulation
8. Occurrence of natural disasters or calamities
9. Occurrence of pandemic or general health hazards
Situations to Consider Liquidation Value
2. Corporate or Project End of Life
o Most corporations only have finite number of years to operate as stated in the Articles of
Incorporation.
o Similar in the case of projects like join ventures with finite life.
o Once the date arrives and life is not extended, due process takes polace to end the life of the
corporation and start the liquidation process.
3. Depletion of scarce resources
o Industries like mining and oil, availability of scarce resources significantly influences firm value
o Industries that are highly regulated by the government. Once the contract with the government
expires or scarce resources become fully depleted this might signal potential liquidation and
valuation should be based on liquidation value
General Principles of Liquidation Value
1. If the liquidation value is above income approach valuation (based on going concern principle) and
liquidation comes into consideration, liquidation value should be used.
2. If the nature of the business implies limited lifetime (e.g. quarry, gravel, fixed term company etc.)
the terminal value must be based on liquidation. All cost necessary to close the operations (e.g. plant
closure cost, disposal costs, rehabilitation costs) should also be factored in and deducted to arrive at
the liquidation value.
3. Non-operating assets should be valued by liquidation method as the market value is reduced by
costs of sale and taxes.
4. 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 asset, the liquidation value should be used.
5. Liquidation valuation must b used if the business continuity is dependent o current management that
will not stay.
Types of Liquidation
1. ORDERLY LIQUIDATION
o Assets are sold strategically over an orderly period to attract and generate the most money for the
assets
o Will expose assets for sale on the open market, with a reasonable time allowed to find a purchaser,
both buyer and seller having knowledge of the uses and purposes to which the asset is adapted and for
which it is capable of being used, the seller being compelled to sell and the buyer being willing, but
not compelled, to buy.
2. FORCED LIQUIDATION
o At which the assets are sold as quickly as possible
o Done immediately, especially if creditors have sued or a bankruptcy is filed
o Assets are sold in the market at the soonest time possible which result in lower prices because of the
rush sale
o Ultimately drives down liquidation value
Calculating Liquidation Value
Present Value of Sale of Asset Php [Link]
Less: Present Value of Cost for termination ( [Link])
and settlement for Liabilities
Less: Present Value of Tax chargers for
the transactions and other liquidation Cost ( [Link])
Liquidation Value Php [Link]
Number of Outstanding Shares [Link]
Liquidation value per share Php [Link]
Present Value (PV) of Cash Inflows
during Years in Operation
𝑷𝑽 𝒐𝒇 𝑨𝒏𝒏𝒖𝒂𝒍 𝑵𝒆𝒕 𝑪𝒂𝒔𝒉 𝑭𝒍𝒐𝒘= 𝑁𝑒𝑡 𝐶𝑎𝑠h 𝐹𝑙𝑜𝑤 𝑥 𝑃𝑉 𝐹𝑎𝑐𝑡𝑜𝑟 𝑜𝑓 10 %
𝑷𝑽𝒐𝒇 𝑪𝒂𝒔𝒉𝑰𝒏𝒇𝒍𝒐𝒘𝒔𝒅𝒖𝒓𝒊𝒏𝒈𝒚𝒆𝒂𝒓𝒔𝒊𝒏𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏=𝑃𝑉𝑜𝑓 𝑁𝐶𝐹 (𝑌𝑒𝑎𝑟1)+ 𝑃𝑉𝑜𝑓 𝑁𝐶𝐹(𝑌𝑒𝑎𝑟2)+𝑃𝑉𝑜𝑓 𝑁𝐶𝐹(𝑌𝑒𝑎𝑟3)
