How do you estimate a company's asset recovery value?

1 Liquidation value

Liquidation value is the most conservative method, as it assumes that the company sells all its assets in a short period of time, usually through an auction or a fire sale. Liquidation value does not account for any synergies, goodwill, or going concern value that the assets may have. To estimate liquidation value, you need to identify the relevant asset categories, such as cash, inventory, accounts receivable, property, plant and equipment, intangible assets, and other assets. Then, you need to apply a discount rate to each category, based on the expected recovery rate in a liquidation scenario. The discount rate may vary depending on the industry, the market conditions, and the quality and condition of the assets. The sum of the discounted values of each asset category is the liquidation value of the company.

2 Net realizable value

Net realizable value is a more realistic method, as it assumes that the company sells its assets in an orderly manner, over a reasonable period of time, and at their current market prices. Net realizable value accounts for some of the costs and benefits associated with selling the assets, such as taxes, commissions, transportation, and storage. To estimate net realizable value, you need to follow the same steps as for liquidation value, but use a different discount rate for each asset category, based on the expected net proceeds in an orderly sale. The discount rate may be higher or lower than the liquidation value discount rate, depending on the nature and demand of the assets. The sum of the net realizable values of each asset category is the net realizable value of the company.

3 Fair value

Fair value is the most optimistic method, as it assumes that the company sells its assets in a normal market, with willing buyers and sellers, and at their highest and best use. Fair value accounts for the full potential and value of the assets, including any synergies, goodwill, or going concern value that they may have. To estimate fair value, you need to use a valuation technique that reflects the market conditions and expectations for each asset category, such as market multiples, discounted cash flows, or replacement cost. The valuation technique may vary depending on the availability and reliability of the data, the level of uncertainty, and the assumptions involved. The sum of the fair values of each asset category is the fair value of the company.

4 Here’s what else to consider

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