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WHY LIQUIDATION MIGHT NOT BE A SIGN OF COMPANY FAILURE

WHY LIQUIDATION MIGHT NOT BE A SIGN OF COMPANY FAILURE

Many factors can contribute to tough financial times for a business, including a struggling economy, hostile takeover, natural disaster, or illegal activity such as theft or frauds. When a business encounters this type of financial turmoil, it may be forced to claim bankruptcy and liquidate some of its assets (including property, furniture computers, etc.) in order to regain some of the investment. The liquidation value is the approximate amount a business can expect to get back when this type of sale takes place.

Usually, this is less than the retail value (sometimes as much as 20 per cent less) as well as the book value (which is the actual amount paid for the assets).  The reason for this decrease in value is that liabilities are subtracted from the assets in order to determine the liquidation value of the business. The liquidation value is usually determined by a qualified professional appraiser, who will provide an estimate so that the company can decide if it actually wants to go through with the process.

Another factor that can influence liquidation values is the state of the market at the time of liquidation. When a firm in financial distress needs to sell assets, its industry peers are likely to be experiencing problems themselves, leading to asset sales at prices below value in best use. Such liquidity makes assets cheap in bad times.

There are two types of liquidation values, depending on the urgency of the situation. Orderly liquidation value applies to a business that can afford to take its time to field offers from a multitude of bidders in order to get the best price for its assets. Often, in these cases, the business can sell items individually instead of selling the whole collection of assets at one time.

Distress liquidation values come into play when a business is desperate to liquidate its assets. Usually, these assets are sold all at once and often to firms or dealers who specialize in purchasing liquidated items. Distress liquidation values are always lower than ordinary liquidation values and in some instances drastically lower.

It should be noted that liquidations are not necessary a sign of business failure.  While much liquidation occurs during poor financial times, others do not. Often a business may be forced to liquidate some of their assets in an effort to keep up with changes in the marketplace. For example, new products or technologies can come out that make older ones obsolete and therefore force a business to buy the new products in an effort to keep up. Some experts contend that some form of liquidation is taking place even amongst most successful companies. If these trends are closely monitored and quickly dealt with, a company should be able to stay ahead of the game and avoid any negative financial repercussions. 

Types of Liquidation

While there are two main types of liquidation values, there are three main categories for the liquidations themselves. Foreclosure liquidation takes place when a creditor gets a court order to take possession of a company’s assets. An agent is usually appointed by the creditor to tend to this type of liquidation.

A voluntary (or orderly) liquidation occurs when the business agrees to sign over possession of its assets and cooperates with its lender (or lenders) in an amicable fashion. During this type of situation, the debtor and lender work together to see that the liquidation goes smoothly.

Unfortunately, some liquidations fall under the category of hostile. This situation takes place when the business in question fails to cooperate with its lender. Many times the debtor will refuse to provide necessary information and act in an unprofessional manner in an effort to sabotage the liquidation. These situations tend to get ugly and often lead to further legal proceedings. Despite these differences, the only way any type of liquidation can be considered successful is if outstanding debts are settled between the business and the lender.

When a company decides to go into liquidation, it either does so immediately or opts to proceed with the process over an extended period of time. A cease and desist liquidation is one that takes place rather quickly. Once it is determined that this is the route that will be taken, the business stops operating and debtors are immediately contacted to begin the liquidation proceedings. 

In this type of situation, it is usually understood that the business and the lender are ending their relationship and both parties move so quickly to tie up loose ends and avoid dragging the situation out. During a winding down liquidation, the business continues to operate while working with the lender to find buyers willing to give them good value for their assets. 

Alternative liquidation

Instead of going into formal liquidation proceedings, a business may want to explore other avenues of liquidating their assets. The can opt to sell items such as vehicles, computers, furniture, or remaining inventory themselves through auctions or by simply placing ads in appropriate publications. A company can also contact their competitors directly to see if there is any interest in buying them out or participating in bulk sale. Both parties stand to benefit when a company sells out to a competitor.

There is an intrinsic value to a competitor to purchase the goodwill and customer list of a company liquidating. Once verification of the sales volume and gross margins is established, a competitor can be induced to purchase the intangible assets. The bank benefits by receiving the value paid for the goodwill and trademark. It is also easier for the outside party to collect receivables from customers that are being serviced by a new company with the blessing and cooperation of the liquidating debtor.

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Bernard Taiwo
I am Management strategist, Editor and Publisher.
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