Forced sale value

Forced sale value
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Methods and techniques

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[edit]

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[edit]

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[edit]

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 necessery to know if the value include any costs involved with selling the items

Footnotes[edit]

  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[edit]

Author: Michał Skrabski