Liquidation Law and Legal Definition
Liquidation is the selling of the assets of a business, paying bills and dividing the remainder among shareholders, partners or other investors. A business need not be insolvent to liquidate. Upon liquidation of certain business, such as a bank, a bond may be required to be posted to assure the proper distribution of assets to creditors.
A receiver may be appointed to oversee such distribution of assets. In this case, a receiver may be required to file a final statement accounting for the distributed and remaining business assets and expenses of liquidation in order to receive a final settlement order from the receivership court.
Additional Definitions
Liquidation and Liquidation Values
Liquidation means turning fixed assets into liquid assets, namely into cash. Thus an owner selling his or her business for cash as a going concern is technically liquidating it—but in usual parlance the term is applied only to a situation where a business is closed and all of its assets are sold. This may happen voluntarily or involuntarily; the owner may simply decide to stop doing business, puts a "Closed" sign on the shop or a message to that effect on his or her answering service, and proceeds to sell everything; alternatively the owner finds him- or herself forced into liquidation to pay off a foreclosed loan or, alternatively, assets are insufficient to cover debt and Chapter 7 bankruptcy liquidation is necessary.
It is a truism of business that a going concern is always worth more than its parts. It's a good rule unless the business is actually losing money and cannot be turned around. There is no particular magic involved in this valuation. The assets of a running business include its clients and their purchases. Machinery, equipment, shelving, and communications systems arranged complexly for a purpose are more valuable as a group than taken individually. The assets of a business may fetch as little as 20 cents on the dollar, possibly even less, all depending on the nature of the business and its inventory. A jewelry shop, the assets of which are mostly unsold diamonds and gold, will do much better than a machine shop with most tools 30 years old or older.
A liquidation tends to be a painful time in business life. Many liquidations follow months, occasionally years of anxiety and agony as a business gradually fails, and liquidation is still painful. It is, furthermore, as painful for a manager liquidating a subsidiary or a division for a large company as for an owner liquidating his or her business. While it is happening, those involved do not appreciate that they will gain valuable experience from the process—as people no less than as business persons. And to liquidate a business effectively is itself a business skill. It can be done well or poorly.
THE LIQUIDATION PROCESS
Deciding to Liquidate
Good timing and sober judgment are important aspects of "success" in times of failure. The earlier the owner realizes that liquidation cannot be avoided, the more resources will be present to liquidate with least pain. Human nature and reason tend to conflict in such situations, as owners hang on for dear life in the face of clearest evidence and lottery-like odds. Almost always the tantalizing possibility of being saved is out there in the form of a big bid, a potential buyer, or some hoped-for event. Setting clear, hard deadlines and proceeding in a business-like manner toward a closing is the best policy. A business liquidating voluntarily and in an orderly fashion will almost always discover that its creditors, customers, and vendors will be cooperative. The sense of control will remain. If in the midst of such a process the miraculous turn-around event actually takes place, reversing course will also be easier.
Preparations
Once a decision to liquidate has been reached, the business needs to be closed, employees discharged, and company assets must be secured and inventoried. In larger operations, the owner will require help in managing the liquidation. Therefore selecting one or more trusted employees to participate in the process is essential before lay-offs are announced and implemented as rapidly as possible. Effective actions in good time are important. Business closures sometimes produce unusual behavior in employees; they may feel cheated; the atmosphere of a free-for-all sometimes develops and caution is indicated to avoid wholesale theft and sabotage. Arrangements must be made to have locks changed and valuable goods safely stored. This is sometimes difficult to do and requires early arrangements. Vendors and customers must be notified after the layoffs are accomplished. This, too, will require early planning. Finally, the owner should take his or her own inventory before third parties become involved.
Participants
People entering the twilight zone of liquidation will discover it is populated by an entire industry little suspected to exist. There are professional appraisal firms whose routine business it is to value business assets. They appraise all manner of inventories and equipment daily and have an enormous depth of expertise. The owner facing such an appraisal, however, must brace him- or herself because prices named will seem extraordinarily low. If an experienced firm has been engaged, it will not be low-balling the assets but accurately valuing them in the current market. Alongside appraisers are liquidators specializing in selling inventory and equipment; a variety of selling techniques are used, including auctions. Unusual venues may be common. For example, all the inventory may be moved to an empty warehouse and laid out for a sale that might extend over several days. Some liquidators have added Internet outlets to their marketing and therefore a photographer may be taking digital shots of selected items as part of inventory.
The owner usually can and sometimes does set aside equipment to be held indefinitely or for sale by him- or herself. By the nature of their contacts, owners may have ideal clients for certain kinds of equipment. The owner can then assign the remainder to a specialist who will sell everything else and dispose as waste or scrap what cannot be moved.
VOLUNTARY AND INVOLUNTARY LIQUIDATIONS
In a bankruptcy liquidation under Chapter 7 of the bankruptcy law a court-appointed trustee will oversee the process and make crucial decisions. However distressed the owner might be—and the distress will be much greater if liquidation is forced by a foreclosure—he or she should refrain from letting things "get ugly." Such liquidations are termed "hostile." The owner then resists liquidation by neglecting orderly preparations, refusing to cooperate, delaying or denying necessary papers, and engaging in various kinds of disruption. Such situations can lead to further legal action and ultimately to much higher costs.
Voluntary liquidations take two forms. The best of these takes place when the owner decides to go out of business while still solvent and able, after liquidation, to pay off all outstanding debt. The second form involves an agreement with one or more creditors to liquidate but without a formal process. In the latter case, which tends to be rather rare, the owner will work in close cooperation with one or more agents of creditors, all parties endeavoring to get the highest possible yield for all assets.
ALTERNATIVES TO LIQUIDATION
If an owner feels that he or she must stop operating the business, the only real alternative to liquidation is to sell the business. This will be possible only if the decision is reached early enough, i.e., before the business actually fails. Sales may have been slipping; profits may have disappeared; but if there is still "life" in the business, it may well be possible to sell it—and at a price higher than liquidation will guarantee. For details on selling a business, see the entry Selling a Business in this volume. Many options are available. For a failing business the route most likely to be successful will involve letting the new owner pay off the acquisition price over time—with the current owner continuing to share the risk with the new owner up to a point.
SEE ALSO Bankruptcy; Business Failure and Dissolution; Selling a Business
BIBLIOGRAPHY
Hood, Doug. "Hard Sell—Managing liquidation of assets." Entrepreneur. November 2000.
Kupetz, David. "A Graceful Strategy for Liquidating a Business." San Diego Business Journal. 2 April 2001.
Kruger, Jennifer Barr. "When it Doesn't Make Sense to Go On: If you're looking at closing your store, you're not alone." Photo Marketing. January 2005.
Robbins, Steven. "Exit Strategies for Your Business." Entrepreneur. 27 July 2005.
Woolmore, John. "More Tips on Ensuring That You Get Paid." Contract Flooring Journal. January 2006.
Darnay, ECDI
