Understanding Liquidation: A Comprehensive Guide for SMBs

Does your business have several outstanding debts and no way to pay them? Or are you looking to close down your small business and sell all the assets? Either way, I’m here to help!

Hi, my name is AJ! I recently sold my business for multiple seven figures and created Small Business Bonfire (SBB) to help other entrepreneurs! Although my most recent company was a success, I’ve learned a lot from fellow business owners about the liquidation process and its potential benefits. Ready to learn about liquidation and how it can help your business? Let’s dive in!

### Key Takeaways

First, let’s understand what liquidation means. Liquidation is the process of selling off a company’s assets to generate enough money to pay back creditors. Typically, this results in the business closing. This usually happens because a company can’t cover its expenses, making selling assets the only way to pay creditors. Now, let’s break down how the liquidation process works.

Imagine you’ve started a lemonade stand, bought a lot of supplies, but your stand isn’t making much money. As a result, you owe money to the parents (or creditors in a real business) who provided the funds for your supplies. If you can’t pay them back, you might have a garage sale to sell everything you bought for the stand. This process of selling all your company’s assets is called liquidation. The money gained from the sale is used to repay your parents, and once everything is sold and paid off, your lemonade stand is closed.

Liquidation in the real world can be more complex, especially for larger businesses. Small business owners might choose to liquidate assets for various reasons. The most common reason is that they owe multiple debts and can’t generate enough cash to pay them off. However, liquidation isn’t always negative; sometimes, business owners liquidate assets to pursue new ventures.

### Types of Assets in Liquidation

During a liquidation sale, a business sells its assets, but what kinds of assets are included? Examples include inventory, furniture, and equipment. Sometimes, businesses donate outdated items for tax incentives. After selling all the assets, the money is distributed among the creditors. Creditors are classified into two main types: secured and unsecured.

Secured creditors have collateral from the business, which differs from liquidated assets. They sell the collateral to cover the remaining loan. Unsecured creditors do not receive collateral and have claims to a company’s liquidated assets.

Companies can also liquidate securities instead of tangible assets. Selling securities like preferred stock or common stock is an option for companies with valuable stocks but few tangible assets.

### How to Liquidate a Business

Here’s a four-step process to help you liquidate your business effectively:

1. **Consult Professionals:** Talk to your company’s lawyer and accountant and inform your creditors about the liquidation.
2. **Prepare Assets for Sale:** Ensure your assets are ready for sale, making them presentable to get the best possible price.
3. **Work with an Appraiser:** Hire an appraiser to set accurate prices on each asset to repay debts effectively.
4. **Choose the Type of Sale:** Decide on the type of sale, such as an auction or online listing, based on your needs.

### Liquidation vs. Bankruptcy

While both liquidation and bankruptcy involve financial distress, they are different. Liquidation is the process of selling off assets to pay creditors and is usually part of the bankruptcy process. Bankruptcy, on the other hand, is a legal procedure that allows individuals or companies to eliminate or repay debts under court protection. It can involve liquidation or reorganization.

### Example of Liquidation

Imagine a small, family-owned restaurant struggling due to a local economic downturn. They decide to liquidate and consult their legal and financial team. They inventory all assets, hire an appraiser, and choose a public auction to sell quickly. The proceeds pay off secured creditors first, then unsecured creditors. After all debts are paid, the owners divide the remaining money, moving on to their next venture.

A company doesn’t dissolve automatically after liquidation. Once the process is complete, it still exists as a shell. To dissolve the company formally, you must file dissolution papers with the state to remove any outstanding liabilities or obligations.

Liquidation is when a business sells its assets to pay back creditors, often due to bankruptcy or the owner’s decision to close the business. Always consult a tax professional and lawyer during this process. Have more questions about liquidation? Let us know!