LIQUIDATION AND LIQUIDATION VALUES



Many factors can contribute to tough financial times for a small business, including a struggling economy, hostile takeover, natural disaster, or illegal activity such as theft or fraud. 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, and computers) in order to regain some of its investment. The liquidation value is the approximate amount a business can expect to get back when this type of sale takes place.

Usually, this amount is less than the retail value (sometimes as much as 20 percent 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 value of 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 the liquidation. According to an article by Andrei Shleifer and Robert W. Vishny that appeared in the Journal of Finance, "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 illiquidity 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 the 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 orderly liquidation values, and in some instances drastically lower.

Recently, many of the most publicized business failures have been those of online retailers (also known as dot-coms). Inexperience, technological difficulties, poor customer relations, and changes in consumer tastes have contributed to the demise of many of these types of companies. But the rollercoaster rise and fall of dot-com companies has lead to new trends in liquidation: that of online e-liquidators. Many new dot-coms are starting up that specialize in buying up the assets of their failed competitors and selling them online at deep discounts. This trend leads to increased sales for the e-liquidators as well as great bargains for consumers.

It should be noted that liquidations are not necessarily a sign of failure. While many liquidations occur during poor financial times, others do not. Often a business may be forced to liquidated 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 the 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 LIQUIDATIONS

While there are two main types of liquidation values, there are three main categories for the liquidations themselves. A foreclosure or Chapter 7 liquidation takes places 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 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 top dollar for their assets.

ALTERNATIVES TO LIQUIDATION

Instead of going into formal liquidation proceedings, a business may want to explore other avenues of liquidating their assets. They 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 a bulk sale. Both parties stand to benefit when a company sells out to a competitor. As Eric Shaw noted in an article for Business Credit, "There is an intrinsic value to a competitor to purchase the goodwill and customer list of a company that is 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."

LIQUIDATION AND SMALL BUSINESSES

In the small business world, many companies are sold to other entrepreneurs who wish to take them over. This is another situation where liquidation comes into play that is not necessarily negative. There are many reasons why a small business owner would want to sell his or her company. These reasons includes retirement, changing career goals, frustration with the marketplace, illness, and even death. Often, this situation is a very emotional one for the seller because they have a lot of personal interest and time built into their business. On the other hand, an established small business would be an attractive entity to a prospective buyer for many reasons as well. A loyal customer base, experienced employees, working assets, and a prime real estate location are some of the things that would attract a buyer to this type of situation.

When a small business is put up for sale, the buyer and seller must work together to determine fair market value of the assets. The seller must document the history of the business and describe how it operates, including relationships with employees, suppliers, and competitors. The book value of the assets and property should discussed. It is recommended that 3 to 5 years worth of financial statements are provided as well. At the same time, the buyer must secure the proper financing so the transaction goes off smoothly. Like any type of liquidation, this type of transaction will be considered successful only if both the buyer and the seller are satisfied with the results.

FURTHER READING:

Shaw, Eric. "Understanding the Art of Liquidation from a Lender's Point of View." Business Credit. January 1995.

Shleifer, Andrei, and Robert W. Vishny. "Liquidation Values and Debt Capacity: A Market Equilibrium Approach." Journal of Finance. September 1992.

SEE ALSO: Bankruptcy ; Business Failure and Dissolution



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