Forced sale value

From CEOpedia | Management online

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

Examples of Forced sale value

  • Forced sale value is often seen in foreclosure sales. In this type of sale, the owner is forced to sell their property at a price much lower than market value due to the urgency of the situation. This can be due to the owner being unable to pay off their debts or because they are in danger of losing their property.
  • Forced sale value can also come into play when a company is in financial distress and needs to quickly liquidate its assets in order to pay its creditors. This can mean selling off inventory, machinery, and other assets at a deep discount in order to quickly raise funds.
  • Another example of forced sale value is when a company is going through a merger or acquisition. In this situation, the company is often forced to quickly sell off its assets in order to complete the transaction. This can lead to a forced sale value that is lower than the market value of the assets.

Advantages of Forced sale value

Forced sale value is a way of selling assets in emergency situations that often comes with a number of advantages. These include:

  • Speedy transactions - Forced sale transactions are generally expedited, which is beneficial for the seller who may need the money quickly.
  • Reduced legal costs - The process of selling assets through a forced sale is often simpler than through traditional methods, which reduces the associated legal costs.
  • More lucrative offers - Forced sale values are often lower than the market rate, but buyers may be willing to pay more than the forced sale value if they are confident that they can make a profit.
  • Increased liquidity - Having assets liquidated quickly can be beneficial for a seller who may need the money quickly.

Limitations of Forced sale value

The forced sale value of assets is often not an accurate reflection of the true market value due to the rushed nature of these sales. The following are some of the limitations of forced sale value:

  • Lack of time for proper research - Forced sales are often conducted in a hurry, leaving no time for the seller to conduct sufficient research of the asset’s true market value. This can lead to an underestimation of its value.
  • Lack of buyers - Forced sales have a limited pool of potential buyers. This can limit the number of bids for the asset and reduce the potential final sale value.
  • Competing interests - Forced sales are usually conducted to satisfy a debt or other obligation. This can create a conflict of interest between the seller and potential buyers.
  • Unfavorable market conditions - Forced sales may be conducted in a market downturn, making it difficult to find a buyer and depressing the final sale value.
  • Lack of competition - Forced sales often lack competition, which can reduce the final sale value of the asset.

Other approaches related to Forced sale value

The following approaches are often used in conjunction with forced sale value:

  • Liquidation value - this approach is used to value an asset which is sold in large parts or all at once in a short period of time. It takes into account the costs of selling the assets, such as marketing and storage, and discounts the value of the assets to reflect the urgency of the sale.
  • Salvage value - this approach is used when the asset is sold piecemeal. It takes into account the costs of disposing of the asset, such as parts and labor, and discounts the value of the asset to reflect the urgency of the sale.
  • Fair market value - this approach is used when the asset is sold in a normal market environment, without any urgency or discounts.

In summary, forced sale value is the amount of money that the owner gained by forced sale of assets and other approaches such as liquidation value, salvage value, and fair market value are often used in conjunction with it.

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


Forced sale value — recommended articles
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References

Author: Michał Skrabski

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