If you see a sign on a street corner that reads something like “Total Liquidation! Everything Must Go!” it’s is a sure sign that there’s a business closing nearby. But what does that term mean for a business?
Let’s dive into the process of liquidation:
What is Liquidation?
There are two types of liquidation: voluntary and involuntary. Voluntary liquidation happens when a business decides independently to get rid of it’s holdings, while involuntary is the result of a court order in order that a creditor get paid. When a business goes into this process, they must sell all of its inventory—things like appliances, bikes, home decor, luggage and other general merchandise.
Other items may be sold as well, such as store fixtures, vehicles, furniture, tools, heavy machinery, office equipment and store decor.
The business then takes those proceeds and pays them out to their creditors so that they can recoup as much of their investment as possible. The entire process is overseen by a third-party company. Often, this is done as part of a business declaring bankruptcy, but it can also be done if a business is moving to a new location and wants to sell off inventory rather than trying to move it all.
What Does a Liquidation Company Do?
Once the process begins, a third-party company will step in to handle everything. These companies take on large projects for major business, such as Walmart liquidation, but are equipped to handle liquidation for smaller businesses as well.
These companies will make sure that assets are distributed out to all the creditors in order of priority as to avoid any claims of bias or unethical practice during the entire process. They have an array of duties, including:
- Determining the number of liquid assets and how much they may be worth
- Addressing any outstanding claims against the company being liquidated
- Distributing the funds amongst creditors
- Acting in the best interests of the investors or creditors of the company—not the business owner
- Investigating the company for any forms of wrongful trading
- Planning out the sale of any items
- Advertising and marketing that sale to potential customers and other businesses
Wrongful trading is when a business tries to sell items after they have already been declared insolvent. This practice can get the business owners into some serious trouble, as they can be held liable for the worth of anything they sold during this time. Creditors should be paid out in a specific order:
- Secured: Any secured credit should be paid first. This creditor has some type of lien against the business or a commitment to pay back whatever assets were borrowed.
- Unsecured: This refers to credit card debt or other types of debt without a secured lien, so these are paid next.
- Stakeholders: Finally, stakeholders receive any compensation that may be left. This may include employees as well.
Once the items are sold, the company is paid. It may receive a percentage of the profits or be paid an hourly wage. Products may be sold through a liquidating sale at the business, an auction, flea market or even by wholesale pallet either in person or online, such as on an official Walmart liquidation site.
What Happens After Liquidation?
Once the entire sale is complete and the third party pays out all proceeds from the sales of laptops, TVs, sandals or other general merchandise, the business closes down.
Whether it is simply moving to a new location or has declared bankruptcy, that location will no longer be in operation.