Liquidation Value

One thing to remember when determining the liquidation value is it is a poor idea to discount liabilities. It’s rare you will be discounted on items your business owes so take them off the balance sheet at face value.

Positives of using the liquidation value include:

1. Everyone has the ability to use this valuation method.

2. Best used to estimate the value of the business under a worst-case scenario.

3. Businesses trading under liquidation value have limited downside (must check against qualitative factors).

4. A can’t miss checkpoint for every analysis.

5. Hard to argue this valuation method as it translates all asset values to cash and deducts liabilities; most conservative.

Negatives of using the liquidation value include:

1. Does not consider the value of future cash flows which is arguably the most important part of business valuation.

Other considerations include:

1. The character of management is always important. The ability of management becomes less important the cheaper the business is.

2. You must always check and factor cash burn. If a business is trading under liquidation value but going to burn the cash difference between liquidation value and market price in a short time frame that business could be trading under liquidation value with reason.

Why This Strategy Works:

1. Reinforces a systematic process.

2. Allows you to gauge real risk which is the main component we will expand on in lesson 4.

3. Forces you to be highly selective, a great form of risk management.

If investing in businesses trading under liquidation value interests you, we have a community of investors that focus on identifying and allocating to these somewhat rare opportunities.