Sometimes a business will need to liquidate due to poor business performance, like not generating enough cash flow or not being able to pay off debts. This can also happen with corporate restructuring, top investors backing out, or if you simply want to part ways with your business.
Read on to learn more about what liquidation is, the different types, as well as how the liquidation process works.
Liquidation is the process of closing down a business permanently and distributing all of the business’s assets to shareholders, creditors, and claimants. This process can be done either voluntarily or involuntarily and usually occurs when the business cannot pay its debts back in time. An insolvency professional (IP) is the official liquidator who is in charge of the process.
Liquidation can happen to both small businesses and larger public companies, and can also be a form of an exit strategy for a business that’s no longer profitable.
An asset is a type of cash or property that can be converted into cash within a short period of time and without a large loss in value. Similar to personal assets, business assets are part of what determines your net worth and include:
The liquidation of a business can happen either voluntarily or involuntarily. Below are the three different types of liquidation:
A creditor’s voluntary liquidation happens when a business owner recognizes that their liabilities exceed asset value or that they’re unable to pay debts on time. The business will voluntarily contact a liquidator to help settle any debts or legal disputes. A liquidation process is then set in place, in which the business owner agrees to cooperate and pay back debts.
Compulsory liquidation occurs when lenders or creditors petition to liquidate a business if debts are not paid within a certain period of time. This process forces the business in question to sell all of its assets to help pay back the creditors.
If the business cannot pay off its debts, it may be forced into total liquidation if there’s a history of debt not being paid in a timely manner. This is also known as insolvent liquidation.
In certain cases, a members’ voluntary liquidation process will be set in place if a business owner wants to exit the company. To make this happen, at least 75% of the members involved with the business must also agree to liquidate.
If approved, an insolvency professional is then selected to settle the business’s legal disputes and debts. Any funds that are leftover are dispersed to the shareholders and members of the company.
The steps involved in the liquidation process are as follows:
In the claim settlement step of the liquidation process, there is a sequence set in place to distribute the assets and pay off creditors. The process is as follows:
When a company is liquidated, the business essentially dissolves and can no longer continue operations. This is a permanent closure, unlike bankruptcy where a company can eventually recover.
Once liquidation is complete, several things happen:
Once the process is complete, all assets will be dispersed and the business will no longer be in operation.
If you’re facing financial challenges with your small business or find yourself in a sales slump, you’re not alone. Luckily, there are some steps you can take to help get your business in order, such as help with financing and cutting back costs. Read more for tips on how to avoid liquidation.
To get a better idea of whether or not your business can stay afloat, you’ll need to take a look at your financial situation. Begin by asking yourself these important questions:
Use the quick ratio formula to determine your ability to pay back bills. Also consider hiring a credit counselor through the National Foundation for Credit Counseling to help you further assess the financial situation of your business.
Thinking of different ways to cut back and reduce spending can help. Consider cutting costs by:
You can also use the gross profit formula to help identify how much to cut back.
It may be a good idea to sort out all of your debts and make a list that prioritizes which ones to pay off first. It’s recommended that small businesses should first pay off things like:
These payments are important to pay off first because if you owe money to creditors, the IRS will be the first in line to collect any assets that can help satisfy the claims.
After the debts above have been paid, focus on paying off bills that are 60 days overdue or more. Then, turn your attention to operating expenses, suppliers and vendors, insurance, and lastly, business credit cards.
If a majority of your business’s inventory comes from lenders and suppliers, it may be worth asking for cheaper prices or negotiating a payment arrangement to cut costs.
That’s why it’s important to build and maintain good relationships with suppliers and lenders—if you ask for a favor in return, they’re more likely to respond favorably in order to keep your business.
Take advantage of resources that are available to you, such as looking into a small business loan. There are several types of loans to consider, including:
Be sure to check out the Small Business Administration (SBA) website to see if you qualify. The resources below can provide more information:
With this guide, you’ll have a better understanding of what’s involved in the liquidation process and different steps to avoid it, like taking advantage of small business loans or reducing spending.
Be sure to utilize QuickBooks Live and accounting software to help with your books and track your finances.
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