Forced sale value

Forced sale value - generally, this term means that the owner (person, or company) of the assets is forced by an extreme situation to sell those assets hurry (e.g. to pay a debt). Prices of selling assets are usually smaller about 30% than normally on the market because of hurry up. The amount of money that the owner gained by forced sale of assets is called forced sale value^[1]. Term: forced sale value is mostly used in the field of mortgage.

Liquidation

In the mortgage sector the forced sale value is also known as a forced liquidation value (FLV)^[2]. As a J.R. Hitchner wrote^[3]: “ forced liquidation value - the estimated gross amount, expressed in terms of money, that could be typically realized from a properly advertised and conducted public auction, with the seller being compelled to sell with a sense of immediacy on an as-is, where-is basiss, as of a specific date”. It is worth to emphasize, that assets are selling as soon as possible. In the case of forced sell, a company does not have a time to wait for purchase offers, and choose best ones. There is an auction and assets are selling one by one^[4].

Why is it useful

Forced liquidation value is useful specially for mortgage lenders. They calculate on the base of FLV if it is worth to give a mortgage for a particular company, and what maximum amount of money they want to lean. The FLV is a protection for lenders, in case of a company insolvency, because the amount of money they will lend is directly comparable to the forced liquidation value of the company. When the company is not able to pay of a loan, the lender has right to force the company to sell the assets and to pay of the mortgage ^[5].

How to calculate

To calculate the forced liquidation value it is necessary to business valuation expert judge every of company's assets. There are few things to remember^[6]:

• The FLV can change in time, because the company can buy new, or replace some old assets
• To evaluate assets it is necessary to know if the value include any costs involved with selling the items

Footnotes

1. ↑ Berry A., 1999, p.55
2. ↑ Risius J.M., 2007, p.131
3. ↑ Hitchner J. R., 2003, p. 261
4. ↑ Hitchner J. R., 2003, p. 261
5. ↑ Risius J.M., 2007, p.131
6. ↑ Hitchner J. R., 2003, p. 617

References

• Berry A., (1999)Financial Accounting: An Introduction International Thomson Business Press, United Kingdom
• Goode R., et al., (2012)Transnational Commercial Law: International Instruments and Commentary Oxford University Press, United Kingdom
• Hitchner J. R., (2003)Financial Valuation: Applications and Models John Wiley & Sons, Inc., USA
• Risius J.M., (2007)Business Valuation: A Primer for the Legal Profession American Bar Association, USA
• Thompson S.D., (1878)A Treatise on Homestead and Exemption Laws F. H. Thomas and Company, USA
• Tracy J. A., Tracy T. (2012) Cash Flow For Dummies John Wiley & Sons, Inc., USA

Author: Michał Skrabski