How to Calculate Forced Sale Value: Everything to Know
Learning how to calculate forced sale value helps business owners even if they are not subject to forced selling.3 min read
2. Forced Sale Value
3. When Should Forced Liquidation Value Be Used?
4. Determining Forced Sale Value
Learning how to calculate forced sale value helps business owners even if they are not subject to forced selling. It is one of the methods an appraiser uses to determine a business's value, which is done for many reasons, such as attracting investors or obtaining financing.
What Is Forced Selling?
Also called “forced liquidation," forced selling means that a business involuntarily needs to sell assets to raise the cash needed to meet an unforeseen expense. This may happen due to a personal issue the business owner is having, a legal order, a regulation, or an economic event.
Forced selling can happen to personal assets as well. Some examples include:
- A person dies, and their estate must sell their assets to pay their debts.
- During a divorce, assets must be sold and the proceeds divided between the two parties.
- Creditors pursue litigation to force debtors to pay them through the sale or auction of their assets.
Forced Sale Value
The term “forced sale value (FLV)” is used by mortgage lenders to express the expected sale value of a property sold after foreclosure. It is usually about 70 percent of the property's fair market value. Another term for this is “forced liquidation.” For most lenders, this is the last resort when they haven't been able to collect the debt any other way.
Forced sale value is the total proceeds of the assets' sale, which are then used to pay the owner's debts. It represents the amount that an individual or business will receive if the sale or auction takes place right away.
This value is a means to calculate an estimate of a company's financial position, if it were to face its worst circumstances. It assumes that the assets will be sold as soon as possible. If time is not an issue, owners can hold out for a higher price, but quick sales typically result in low prices.
This estimate, calculated by a professional appraiser, can help individuals or business owners decide how to proceed with their current situation. The time frame for the sale is usually 90 days or less. All of the items to be sold at auction are appraised, and the expected amounts added up to create the forced liquidation value.
The forced liquidation value, therefore, represents the minimum amount that business or personal assets are worth. It assumes the individual or business is having a crisis and needs a quick sale. It is almost always much lower than the value of these assets if they were sold at fair market value.
When Should Forced Liquidation Value Be Used?
A business should use forced liquidation value when it is in financial trouble and has no choice but to sell its assets. Even if a company plans to sell an item at auction, a business that is in good financial health can afford to spend time preparing it for sale instead of selling it as-is. The business can also afford to wait for the right buyer to come along, at the right price.
Another time that a business may need to use forced liquidation value is if it's in a hurry to sell items in order to make room for changes, upgrades, or new equipment.
Businesses or individuals who need appraisals of forced liquidation value should find a professional appraiser who is familiar with the industry. They also need to understand the concept of “time to sell.” Because of these two factors, an asset might have a different sale value under different circumstances.
Determining Forced Sale Value
A professional appraiser uses many factors to calculate the value of a business's forced liquidation. First, they estimate the price of each asset if sold at auction after 60 to 90 days of advertising the sale. Then they add together the prices of all the business's assets.
The forced sale value will likely change as time goes by because the business will sell some of its assets and buy new ones. It also relies on several assumptions that may not be true at any given time. For example, it assumes that the asset's buyer is paying any costs involved in moving items from one place to another. The value also does not always include any costs involved with selling the items.
If you need more information or help calculating forced sale value, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.