Liquidation is the process of converting property or assets into cash or cash equivalents by selling them, whether publicly or to a known group of customers, partners, suppliers or even competitors. Businesses usually engage in liquidation in order to close the business and extract as much cash or value as possible for creditors.
The aftermath of the pandemic will likely lead to more liquidations. While generous and flexible government assistance programs for businesses were available for over one year, they have come to a close, leaving struggling businesses with few options. According to BBC News, in the first three months of 2022, there was a 19% rise in businesses in “critical financial distress” compared to the start of 2021. As such, options for survival, including liquidation, will likely be on the rise.
Business Liquidation 101
Liquidation of assets may be either voluntary or forced. Voluntary liquidation may be taken on by a business to raise the cash needed for new investments or purchases or to close out old positions. A forced liquidation may be used in bankruptcy procedures, in which a company chooses or is forced by creditors or a legal judgment to turn assets into cash or cash equivalents.
Another liquidation type is a liquidation sale, a strategy often used by retailers advertising that they wish to sell their inventory quickly at unusually lower prices. This does not necessarily mean that the retailer has been forced to liquidate by creditors or by a court order. In this type of transaction, liquidation is a term used by the retailer to encourage rapid sales at higher discounts to move merchandise.
Liquidation vs. Bankruptcy or Restructuring
If a business is facing liquidation, it may opt instead for a “second chance” Chapter 11 bankruptcy a type of bankruptcy that grants a debtor the space and legal protection to restructure their business and pay back creditors over time.
Restructurings have historically been carried out by large corporations while small businesses consider bankruptcy or liquidation. However, small businesses can undergo restructuring, and recent laws have made these more cost-effective for smaller entities, including the Small Business Reorganization Act.
How To Liquidate a Business During Distressed Times
Stakeholders looking for how to liquidate a business should know there are several steps involved. This is no easy process; regardless of a business’s size, planning, evaluating, pricing, and preparing assets for sale can take much time and effort. You can lean on professionals with experience in helping businesses raise cash through liquidation.
1. Create a Plan
Speak with your lawyer and accountant, and devise a plan for the liquidation process. The plan should provide as many details as possible related to which assets will be sold and expected revenues. The plan should also be shared with all of your creditors.
2. Prepare Your Assets for Sale
Conduct an inventory of your business assets. These can include unsold merchandise in addition to fixtures and even leased equipment, as you might be able to pay these off or transfer the lease to another business. Photographs, descriptions, histories and any other information that would make your assets more marketable should be prepared in support of the liquidation.
3. Determine the Liquidation Value of Your Assets
The liquidation value is generally at least 20% less than the retail value, notes the U.S. Small Business Administration. To establish the liquidation value of your assets, work with a qualified appraiser and obtain a written liquidation value appraisal before you entertain any offers.
4. Choose the Best Type of Sale for Your Assets
You may wish to engage in several different types of sales, depending on the assets and asset types. You can handle the sales yourself, such as a retail “going out of business” sale, or you can hire professionals to serve as intermediaries to help you with public auctions, sealed bids, negotiated sales or consignment sales and liquidation payouts.
How To Best Manage Documents during a Liquidation or Restructuring
As thousands of pages of highly sensitive documents are handled by dozens or hundreds of people in a liquidation, bankruptcy or restructuring, security and tracking are needed to ensure that the right access has been granted to the right people, and that access has not been granted inappropriately or security compromised.
Organizations should consider an enterprise document security solution, such as CapLinked, which has these needs in mind. Digital rights management capabilities provide encryption and complete control over how a document is used, edited, copied or even printed. CapLinked’s FileProtect feature lets companies share documents while retaining the ability to deny access to anything, even after a file is downloaded.
In today’s “anytime anywhere” environment, documents are most likely accessed via multiple cloud platforms. CapLinked provides cloud integrations with such platforms as Salesforce, Dropbox, Box, Google Drive and OneDrive. Ready to learn how CapLinked can make your enhanced due diligence process seamless? Start your free trial today.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce and IoT.
Sources:
TheBalance SMB – What is Business Restructuring?
Investopedia – Liquidate
Small Business Administration – Liquidating Assets
BBC News – Number of firms in critical financial distress rises sharply
