Which valuation method is typically used for distressed companies?

The appropriate valuation method for distressed companies is commonly the liquidation analysis. This method estimates the net cash that would be received if the company's assets were sold off in a hurry, typically in a situation involving bankruptcy or significant financial distress. Since distressed companies may not generate positive cash flows or have the potential for growth, traditional valuation methods like discounted cash flow analysis or comparable company analysis may not provide accurate results. Liquidation analysis focuses specifically on the value of the company's tangible and intangible assets under forced sale conditions, providing a clearer picture of what stakeholders might expect to recover during liquidation. This method is particularly relevant because it emphasizes the immediate financial realities facing distressed entities, ensuring that valuations are grounded in the likely scenarios of asset disposals rather than speculative future earnings.