How Does a Business Liquidation Work?

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Definition

  • Business liquidation can be used as either an exit strategy, planned when you wrote your business plan, or it can be the result of your business taking on so much debt that it is near bankruptcy. When you liquidate your business, you sell all of its assets. The resulting money is then used to pay off your debts, generally in the order of importance. If there is any money remaining from the liquidation, that money is then given to the owner or divided among multiple owners.

The process

  • Liquidating your business is a process that requires time and careful consideration. The first step is to consult with an attorney and an accountant, both of whom will be able to walk you through the process. If you are liquidating your business because of debt, you will also need to contact your creditors to ensure they are willing to support your plan. Never approach your creditors until you have crafted a thorough liquidation plan that has been reviewed by your attorney and your accountant.

Asset inventory

  • Once your creditors have agreed to your liquidation plan, you're ready to begin compiling a list of all of your assets. The Small Business Administration (SBA) advises that you describe each asset in detail, including the condition and serial number of each. Consider taking photos of each asset that you plan to sell. It's also important to ensure that your assets are in good condition, so repair and clean products that need work.

    If you are leasing equipment or other merchandise, the SBA recommends purchasing the product if the purchase price is within reason. You can then liquidate that product when you sell your assets.

Hire an appraiser

  • Unless you have experience valuing liquidation assets, hire an appraiser. The liquidation value of an asset, according to the SBA, is typically 20 percent lower than the product's retail value. Your appraiser will appraise your assets and provide you with a written copy of his findings. You can then determine if your assets are valuable enough to sell.

    Never sell an asset until it has first been appraised, and always carefully consider offers before making a sale.

Sell your assets

  • Finally, you have several options for how you actually sell your assets, including: online sales, sealed bidding, going-out-of-business sales and a public auction. Consult your attorney to determine which venue is the best for your particular needs and what rules govern that particular method of selling. For example, if you decide to sell your assets online, you must follow the rules as outlined by the Federal Trade Commission in its publication "Internet Auctions: A Guide for Buyers and Sellers."

Pay off creditors

  • Once your assets have been sold, you can pay off your creditors. Any remaining money will then be split among the owners of the business that has been liquidated.

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