What is the Liquidation Value Startup Valuation Method?
The meta image of this post is the result of using the prompt "A 3D render of a cute flame bowerbird surrounded by snowflakes" in DALL-E
What is it?
The Liquidation Value valuation method shares some similarities with the Book Value method, but the way they arrive at a final valuation is fairly different.
The fundamental difference between the two methods is:
The Book value is calculated by subtracting the total liabilities from the total assets.
Book Value = Total assets (tangible + intangible) - Total liabilities
Thus the Book Value represents the company's worth as per its balance sheet in a given moment of time, stating the historical cost of assets. It reflects what stockholders have put into the business.
The Liquidation value is calculated by factoring in the cost of depreciation to the tangible assets of the company.
Liquidation Value = Tangible assets - Depreciation
Therefore, the Liquidation Value represents the money the stockholders could get out of the business, should it be liquidated immediately. Since the Liquidation Value is not taking into account the intangible assets, which oftentimes represent a big chunk of a startup's moat, it is likely that the Liquidation Value < Book Value.
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References
- https://www.veristrat.com/blog-valuation/startup-valuation/
- https://thebusinessprofessor.com/en_US/business-personal-finance-valuation/liquidation-value
- https://www.investopedia.com/terms/l/liquidation-value.asp
- https://copperpod.medium.com/startup-valuation-how-to-calculate-what-your-startup-is-really-worth-1fc3a4eff4e9
- https://valueinvestingbasics.com/difference-between-book-value-and-liquidation-value/