Selling a company to an interested buyer is the method most commonly associated with getting out of a business. But for many small business owners, liquidating assets is often the best or perhaps only feasible method of exiting their businesses, especially retail businesses.
In this article, we explore what business liquidation is, how it’s different from dissolution, when to consider it as an exit strategy, and steps to liquidate your business.
What does it mean to liquidate your business?
Business liquidation is the direct conversion of assets to cash or cash equivalents by selling them to a user or consumer.
Liquidation is typically an option if your business is insolvent and can’t pay its bill or debts. When your business is liquidated, any remaining assets are paid to creditors and shareholders. Liquidation can also be a voluntary option. For example, if your business doesn’t have a viable future, you can choose to liquidate and cash out your business.
There are generally three categories of business that will liquidate assets:
- Businesses with assets used indirectly in the production of income. This generally includes the furniture, fixtures and equipment (FFE) of a service business, such as insurance agencies, attorney's offices, etc. The liquidation value is extremely limited and can usually only be sold to used office equipment dealers, although an auction is sometimes viable.
- Businesses with assets used as tools in the direct production of income. This would include restaurants, manufacturing, and construction companies. These assets can be sold to similar types of businesses, sold or consigned to used equipment dealers, or liquidated with the assistance of an industry-specific auction house.
- Businesses whose assets directly produce income. These are retail storefront businesses and, for our discussion, are independently owned and operated. This includes independent stores, apparel and shoe stores, sporting goods stores and furniture stores. (Public companies and multi-unit operations, such as major chain stores, also fall into this category.
Liquidation vs. business dissolution
Business liquidation differs from business dissolution in the following ways:
- Liquidation is part of the process of ending a business. However, if your business entity is an LLC or corporation, it will continue to exist and is still subject to obligations such as annual filing and taxation requirements.
- Dissolution is the process of terminating a legal business entity. When your business is dissolved with the state, its compliance obligations also end (assuming you are up to date).
Reasons for choosing business liquidation as an exit strategy
The reasons for liquidating your business are numerous.
- Lack of family interest: Perhaps your family forms no part of your succession plan, has no interest in taking your business over, or may not be capable of continuing the business.
- Avoiding bankruptcy: If your business is at least solvent or near-solvent, bankruptcy is not an option. And even if you were near or at insolvency, you'd probably find it preferable to liquidate your assets and negotiate amounts owed to your creditors, while at the same time avoiding the stigma of bankruptcy.
- As an alternative to selling your business: You may also come to realize that selling a business with significant assets is much easier said than done. Most potential buyers will not pay full price for inventory. What’s more, many business owners prefer to purchase their own assets (equipment or inventory) and start a new business rather than buy an existing one.
Using a liquidation professional
To ensure you gain the true market value of your business, pay off all debts, and properly evaluate and convert inventory to cash, it’s important to hire the services of a liquidation professional.
Liquidators use several approaches. Some employ "off-the-shelf" plans that involve a one-size-fits-all strategy. The liquidation firm will use the same template with each client and only change the name, which allows them to start a sale quickly.
Others develop a plan tailored to fit your business. This approach takes longer and involves a detailed analysis of your business. They may use an overall discount for the business, tailor discounts for each department, or insist you re-price your inventory. There are two types of fees: commission-based or based on the sale period (weeks). Finally, the firm may be on-site, remote, or on-site as needed.
As when contracting with any consultant or other professional, you should evaluate each liquidation professional before making a decision. Consider the following:
- Can they demonstrate a history of successful results? Request references for the past three years for all sales and for the representative who will be on-site for your sale.
- Have them explain how all aspects of the sale will be conducted.
- Will they explain all the details of the sale?
- Will they provide a formal proposal and projection for the outcome of your sale?
- Are there any hidden costs?
- Would you be comfortable doing business with them?
Steps for liquidating business assets
If you operate a store, liquidating retail inventory can be challenging. The entire or majority of your lifetime savings may be tied up in the inventory, and converting this inventory to cash can be critical to your financial future.
To help you prepare, review the following basic steps for liquidating your assets:
- Draw up an inventory of the assets you want to liquidate.
- Use a qualified appraiser to determine how much prices should be reduced for different categories or sections in your store. Choose a way of lowering prices that's simple and works well. Set a timeline for discounting your inventory over time and decide when and by what amount you will do so.
- Develop a promotion program that will support the actual sale and closing of the store, including discounts, daily offers, and last chance bargains.
- Work with a professional auctioneer to publicly auction assets or use the services of a business broker.
- Select the best time of year for your sale.
- Keep the sale as short as possible to limit overhead expenses.
You may also want to partner with local brokers or dealers to sell certain types of equipment.
Whatever your liquidation strategy, don’t forget to secure and monitor your assets and continue to meet insurance and bond requirements until your business is closed.
If you choose to dissolve your business
If you choose to dissolve your business rather than liquidate it, you must follow a separate process. This involves, filing a Certificate of Dissolution, notifying creditors, and filing a final tax return. For more information, see How to dissolve a business in 7 steps.