Glossary

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Liquidation Value

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In the context of mergers and acquisitions (M&A), the liquidation value refers to the estimated value of a company’s assets if they were to be sold off and the company were to be shut down or liquidated. This value is often considered in the event of a company facing financial distress or insolvency. There are different ways to calculate liquidation value, and the method used may depend on the specific circumstances and the nature of the assets involved. The two primary approaches are Orderly Liquidation Value (OLV) and Forced Liquidation Value (FLV). Orderly Liquidation Value assumes that the assets are sold in an orderly and systematic manner over a reasonable period. It takes into account factors such as time, market conditions, and transaction costs. Forced Liquidation Value assumes a more rapid sale of assets, often under the constraint of time pressure or financial distress. It typically results in a lower value than the Orderly Liquidation Value due to the urgency of the sale. In M&A transactions, the liquidation value may be relevant in certain situations, such as when determining the minimum value of a company’s assets or when negotiating the terms of a deal. However, it’s important to note that M&A transactions usually focus on the “going concern” value, which considers the company’s ability to generate ongoing cash flows and operate as a viable business entity. Investors and acquirers may use the liquidation value as a conservative measure to assess the downside risk or as a basis for establishing a floor price in negotiations. It provides insight into the value of a company’s tangible assets in a distressed scenario, though it may not reflect the true value of the business as a whole as a going concern.

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