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How Does Liquidation Work?

In Business
February 04, 2021
How Does Liquidation Work?

You may have been to a liquidation sale. They’re usually the last resort for a closing retailer to generate some cash before closing the doors for good. You’ve probably seen the signs that read ‘everything must go’, and that’s because these companies are eager to unload everything to pay off any outstanding debt.

However, liquidation is more than just a going out of business sale, and it expands into more opportunities for consumers and sellers alike.

What is liquidation?

Liquidation refers to a company selling off their inventory, usually at a large discount, to bring in some cash. Merchants and retailers sell off pallets of unsold merchandise, ranging from consumer electronics to home decor. This inventory can be sold off to retailers on a wholesale basis or selling a smaller quantity to inventory liquidators. On a direct-to-consumer retailing basis, these goods can be sold through liquidation stores and even business-to-business liquidation companies.

While some online liquidators opt to sell off “as is” merchandise like customer returns, there has been a growing push to offer tier 1 brands with products ranging from grade A to salvage-grade to give consumers an idea of the status of these goods. Some B2B liquidators can actually opt into product refurbishment, taking customer returns and returning these products to manufacturer standards to be ready for resale.

When it comes to liquidation in the accounting world, it refers to the process by which a company will try to settle off their assets to generate cash to pay back debtors.

Understanding Assets

When it comes to a company’s assets, it’s more than just the inventory they have stocking their shelves. Business assets that can be put up for voluntary liquidation can include:

  • Furniture and home decor
  • Tools and machinery
  • Packing supplies
  • Office supplies
  • Vehicles

These assets can be sold off as part of a bankruptcy filing. A business can liquidate most or all of its inventory as part of moving to a new location, saving money on transporting a truckload of goods to a new spot. Inventory clearance is often times viewed as a last resort for companies, mainly because they’re selling off pallets of items at a value much lower than what they would sell at for retail.

Paying Off Creditors

For a company that’s going out of business, liquidating assets, or converting them to cash, it helps to pay off creditors. However, there are different classes of creditors for businesses to consider creating an order of which debtor gets their money first.

A secured creditor is a company with a lien against the business. For example, when a company leases a car, the lender has a lien on the vehicle, so if a company stops paying, they can take back the car. There are unsecured creditors, such as credit card companies, who have no security interest other than having that debt paid back. Therefore, they find themselves second in line for payment. That’s followed by stakeholders—people and organizations with a vested interest in the business like employees.

Companies that need to head into liquidation as part of a quick sell off to appease bankruptcy proceedings can actually entrust in businesses that are experts in the matter. These businesses buy a company’s entire inventory and assets, and then sell them to other retailers. However, some liquidators are retailers themselves. Stores like Big Lots take a truckload of unused inventory, purchase it for a fraction of the retail value, and sell it on their floor at a profit for them.

If a company is locked in bankruptcy proceedings, they must be sure to be in touch with their financial institutions and credit unions throughout the liquidation process to make sure everything is done in the interest of paying down creditors.