What methods do you guys use to determine inventory liquidation value?
What type of inventory/company are you looking at? For example, if I’m looking at an oil refiner whose inventory consists of stuff that’s easy to sell at a market traded price, not much of a haircut and easy to value. That’s going to be a lot different compared to inventory at a tech company or a retailer where you’re subject to obselescence (along with other risks)… just as an example.
Inventory is broken into 3 parts
Raw Materials (maybe most valuable)
Finished goods (maybe most valuable)
And Work-in-Process… Useless unless someone wants a car missing a transimission and door.
I ruthlessly and unapologetically discount the hell out of it. Liquidation value is a great concept on paper. In reality, a lot of things are very difficult to liquidate and often sell at a huge discount if you can even find a buyer. It depends heavily on the asset.
We use to use a liquidator whom would buy inventory at 20-30% of book value and FFE (furniture/fixtures/equipment) for 50-60%. This is always our assumption when determinining net asset value of a business.
Interesting and useful data point there…
Sounds about right. Bad equity investors like to value it at 0.80-1.00 on the dollar but we know that’s not right.