Salvage value is the price at which any object is sold on the market at certain times. It is always below market value.
Also, liquidation value is an indicator that arises in the presence of some extraordinary circumstances that affect changes in the normal market situation (for example, when a company goes bankrupt).
Factors influencing resale value:
- economic situation in the market;
- the direct dependence of the cost of liquidation on the term of sale of the subject, known as the "exposure period". It depends on the type of real estate, the initial cost of sales and the level of demand;
- the level of attractiveness of the subject in the market, which is determined by specific characteristics. It depends on the demand for a particular type of facility.
Salvage value is determined in such cases:
- the company faces the threat of bankruptcy;
- an assessment of the business entity showed an excess of the liquidation value of the company before that which will be in the process of carrying out the activity.
Methods for assessing the cost of liquidation of a subject
1. Direct methodology involves the calculation of residual value using a comparative approach (direct comparison with similar enterprises and the method of correlation and regression analysis).
2. Indirect methodology involving the calculation of value through market valuation. In this case, the residual value is the market price minus the cost of the factor of the forced sale of the enterprise. It is in determining the magnitude of this factor that the main difficulty consists. Therefore, mainly in the domestic market, the cost of forced sales is determined by experts.
