How Liquidation Benefits a Business

published Sep 02, 2019
3 min read

Considering roughly 80% of all startups will go under within a few years of operation liquidation is quite common. During the liquidation process a company is brought to an end. The company’s assets are then distributed to all applicable supplicants.

There are also wholesale and retail liquidation companies that will buy merchandise that has been liquidated from others and then resell said merchandise to consumers as well as smaller enterprises in bulk. Such companies are sometimes known as merchandise liquidators. Here, we discuss liquidation and how it can benefit a business.

Types of Liquidation

Liquidation is usually broken into two distinct categories. Creditors’ voluntary liquidation (CVL) occurs when both the shareholders and the directors of the company mutually decide that liquidation is the best course of action because the concern is insolvent and lacks the assets required to pay off all affiliated creditors. In other words, the company is unable to pay off its debts, and voluntarily opts to close the company in order to pay off its creditors.

However, in some cases a company may be forced to liquidate because one, or multiple of its creditors, have taken the company to a high court due to withholding of debt repayments. If the creditors win their case in the high court then the company will be forced to liquidate so that its assets can be sold off to pay back the creditors. Such a form of liquidation is referred to as “compulsory liquidation”.

Why Liquidating Assets Is a Good Decision?

By liquidating a company’s assets the company will no longer have to worry about legal actions, as they will be halted thereafter. The company’s outstanding debts will be written off after the company liquidates, and leases can also be cancelled afterwards. Moreover, the company’s staff can be compensated by receiving redundancy pay, so that they can leave somewhat satisfied when all is said and done.

Liquidation can also help a company avoid arduous and tedious court processes, and liquidation is actually a relatively affordable process. Companies who liquidate will also generally receive less pressure from their creditors, as most, if not all, will receive at least some form of repayment after a company sells off its assets.

Who Shall Prefer a Merchandise Liquidation?

Businesses whose assets directly generate income may want to consider liquidation, as should enterprises who possess assets that are the tools used to generate income. Even corporate entities who possess assets used to indirectly generate income can benefit from merchandise liquidation.

Assets for Liquidation

There are many assets that a company can sell in order to pay back its creditors. For instance, a business can sell real estate, art, supplies, corporate vehicles, office furniture, security deposits with utilities, taxing agencies, or landlords, prepaid insurance premiums that can be refunded back to the company, and a plethora of business equipment; including, but not limited to, credit card machines, phones, computers, printers, fax machines, scanners, and cash registers.

Many merchandise liquidators will purchase such items and then sell them in bulk to either consumers looking for a deal, or smaller companies, such as startups, who need a few extra supplies to get their company off the ground.

Steps of Liquidating Your Assets

To begin, a liquidator will be appointed. In a compulsory liquidation case it is the court who will make the order. However, during a voluntary liquidation process it is the shareholders of the business who will pass the resolution. In any event, the appointed liquidator will then collect the corporate assets of the enterprise, including uncalled capital (i.e., the amounts unpaid on corporate shares) and then sell them off so that they can use the money to pay back the company’s creditors in order of priority.

Furthermore, in the event that there are leftover funds after all assets have been sold the liquidator will distribute the surplus funds to the shareholders of the business. Afterwards, the business is officially or formally dissolved. After the company has been liquidated it will no longer be authorized to dispose of its property. As such, we would recommend, if possible, that you hire a professional merchandise liquidator to help expedite the process and help maximize your return on investment.

Benefits of Liquidating a Business

Liquidating a business will help get rid of excess inventory. For instance, a company that specializes in distribution or retail will likely have some superfluous inventory at the end of the period. The excess stock will not only take up space that could be put to better use, but will also add to the company’s storage expenditures. However, if the company decides to liquidate then it could get rid of the excess inventory and sell the unwanted assets to pay off its creditors, while also saving on storage costs.

Another advantage is that the provider will ensure that the company’s marketing campaigns are running as intended. In other words, the company’s marketing team will not feel pressured to focus on marketing strategies or campaigns, as the provider will be responsible for promoting the business’s reputation. As such, company resources can be used to focus on other, more important or pressing matters.

Moreover, some providers will actually take care of any logistical costs during the liquidation process, and will follow all of your instructions in order to do so effectively. They may even offer relocation and packaging services, which means the company will have peace of mind, as most of the work will be done for them in a timely, economical, and efficient manner.

Finally, liquidation will allow a company to pay off its debts. In fact, by law a liquidator can opt to pay a company even before they sell their stock. As such, a company can use the advanced payment to either purchase new stock or pay off its creditors. The company may also have the option to buy fixed assets that can be used to reap profit in the not too distant future. If you would like to learn more about how liquidation works, refer the following infographic.

Source: Michaels Global Trading