Thousands of businesses close their doors each year in the United States. But what happens to all of their stuff? That’s where a liquidation sale comes in. A liquidation sale allows a company to sell off its assets, usually for a discount, to generate cash. Then that cash is used to pay off creditors and shareholders. Typically, a liquidation sale is the result of a company filing for bankruptcy and closing for good. With thousands of physical retailers shuttering across the nation, liquidation sales have become a massive business in and of themselves.
What Is a Liquidation Sale?
A liquidation sale is the process of a company selling its assets to pay back creditors. Most often, a liquidation sale happens when a company has filed for bankruptcy and is planning to go out of business. If a company is otherwise unable to pay its debts and isn't able to close the business in another way, a liquidation sale is the last ditch effort to drum up some cash to smooth the process. All proceeds from a liquidation sale must go to creditors and shareholders. A business owner can only profit from a liquidation sale once debts have been settled and shareholders have been paid out.
One important thing to understand about liquidation sales is that you can sell more than just your products and inventory. A liquidation sale also includes store fixtures, décor, computers, office equipment, company vehicles, machinery, art, packing supplies, materials for manufacturing, furniture, property, leases and more. Pretty much anything of value your company owns can be sold in a liquidation sale. Most companies hire a professional liquidator to determine what can be sold, where and at what price. These companies help you get the maximum amount of cash for your assets.
Note that a liquidation sale is just one strategy of closing your business. There are other means of closing a business, including selling the company or acquisition. Whether your company is struggling financially, or you no longer have the desire or means to keep the business running, there is an exit strategy best suited to you. A liquidation sale is just one option.
How a Liquidation Sale Works
Liquidators have many years of data, not to mention a store’s complete sales history, to help them determine how to price items for sale. Generally, a liquidation sale happens over a period of eight-to-ten weeks. Items start at a lower-level discount, and then as the sale moves on through the weeks, unsold items are increasingly discounted. This ensures that most products move at the highest price point possible, maximizing return for the business. Aside from figuring out how to price items, liquidators also decide where to send merchandise. For example, a higher quantity of merchandise is sent to higher-traffic stores. This helps ensure that everything is sold out.
Pricing strategy is crucially important for a liquidation sale. Items that are typically slow to sell start with steeper discounts. Meanwhile, popular, hot-ticket items start out with modest discounts and become more heavily discounted if they don't move. Liquidation sale discounts can reach up to 80-or-90 percent by the end of a sale. By that point, there usually isn’t much high-demand stock left.
During a liquidation sale, purchases are final. What's more, discount programs and coupons are discontinued, and gift cards stop being accepted after a certain point in the sale. Typically, the store’s regular shoppers nab most of the discounted items at the start of the sale. When the stock starts to get low and pickings are slim, resellers pick up the heavily discounted items. Finally, when most of the stock has been cleared, local retailers purchase fixtures, shelving, display cases, cash registers, furniture and other business items.
Why Businesses Use Liquidation Sales
Liquidation usually occurs as part of a bankruptcy filing. Liquidation sales are used to generate cash to pay off a business’s outstanding debts. However, you don’t need to file bankruptcy to have a liquidation sale. There are other reasons a business might liquidate its assets besides going out of business. For example, a company moving to another state could find it cost-saving to liquidate assets, rather than transporting everything to a new location.
Further, businesses may choose to liquidate parts of their inventory. For example, if your business has decided to upgrade technology, you may want to liquidate your current computers, printers and other pieces of technology. Or, if you’ve decided to discontinue a certain product line, you might consider liquidating what is left of your inventory.
Businesses can try to liquidate inventory themselves or they can sell to liquidators, who then turn around and sell that inventory to other retailers. Certain retailers, such as Big Lots also act as liquidators. They do this by purchasing highly discounted inventory from other retailers and then reselling it for a profit in their stores.
Ultimately, a liquidation sale is a process of cutting your losses and trying to generate as much cash as you can from your assets. Of course, because of the short timeframe involved, you likely won’t get full market value for all of those assets. But the cash you generate can help soften the blow and pay back those to whom you owe money.
Liquidation Sales Pros and Cons
There are several pros and cons to consider when deciding whether to have a liquidation sale. It is not the right choice for every business, and it’s important to crunch the numbers and do your research before deciding if a liquidation sale is a feasible option.
Pros of Liquidation Sales:
- Quick and easy: Having a liquidation sale is quick and easy compared to the months of negotiations that can accompany other business-closing strategies. The entirety of a liquidation sale takes place over eight-to-ten weeks. So, within a few months, your assets are cleared, and your cash is tallied.
- No negotiations: Every business owner knows that negotiations can take ages. If you plan to sell your business, the process can carry on for months, or even years. While other business-ending strategies may ultimately pay out more money, your time is valuable. A liquidation sale rips the band-aid off, and you won’t find yourself caught up in endless negotiations with potential buyers.
- No transferring of power: Selling a business isn’t quite as straightforward as signing on the dotted line and handing the new owner the keys. Presumably, you would have to help the new owner and team with the transition process. Again, this takes valuable time and resources. With a liquidation sale, you make a clean break and don’t have to worry about ushering your business into a new era.
Cons of Liquidation Sales:
- Leaving money on the table: If you liquidate your business, you will likely leave money on the table. You probably won’t get market value for everything you own when you are trying to sell quickly.
- Intangibles can be liquidated: While you can liquidate any physical assets your company has, you can’t necessarily sell everything. For example, trade secrets, expertise, client lists, sales data, business relationships and more all hold massive value. But you can’t usually sell most of these intangibles in a liquidation sale. When you sell a business, all of these intangibles contribute to its overall value. Liquidation sales are a bit crude in the sense that they usually only apply to physical assets.
- Shareholders could be upset: If your company has shareholders, they may not be happy with the idea of a liquidation sale. Shareholders often prefer other, more profitable business-closing strategies.
How to Hold a Liquidation Sale
The first step to holding a liquidation sale is speaking with your lawyer and accountant. They can help advise on the best steps to take towards liquidating your assets. Before jumping in, you also need to inform your creditors that you will be holding a liquidation sale.
Next, you need to prepare your assets. This means you should have a full, accurate accounting of your inventory, and where everything is located. Make sure your inventory is presentable and ready to sell. For example, a company automobile should be cleaned, so it is more attractive to buyers. Locate and organize all warranties, records and receipts of any equipment you might be selling.
In most cases, you should also hire an appraiser for a liquidation sale. A knowledgeable appraiser can help you figure out how much your stuff is worth, and what to charge so you maximize your bottom line. They can also help you estimate how much you will get from the entirety of your sale, helping you financially plan for the aftermath of the sale.
You also need to determine what type of liquidation sale you want to have. There are several options, including an auction, an internet sale, consigning your assets and a retail or going-out-of-business sale. Each of these sales has its own pros and cons. For example, an internet sale might net you more money, since you’ll have a wider audience buying from you. However, if your business isn’t set up for selling online, this type of sale could require more cost and headache than it’s worth. Always consult with your appraiser, accountant and lawyer before deciding how to proceed with your liquidation sale.
How to Avoid Liquidation Sales
A liquidation sale is just one way to close a business. There are other options to explore if you are planning on closing your business.
- Selling: You can always sell your company. One way to do this more quickly and without a ton of hassle is to work with friendly buyers, such as those you already have a relationship with. Think about who would want to see your business kept going. Maybe it’s your employees or a strong manager who has taken on a lot of the operations. Perhaps one of your true-believer customers might be interested. Or, another option is a family member or friend. If none of these options are viable, you can also sell your business to your competition. Those trade secrets, client lists and all of your data will be appealing to your competitors. If you offer strong buyer’s incentives and price your business smartly, this could be a much more profitable strategy than a liquidation sale. Plus, your business’s legacy will continue.
- Acquisition: This is one of the most common exit strategies for businesses. Essentially, another company buys yours and acquires it. You can negotiate your price, and often can get much more than you would if you liquidated. And the acquiring company gets all of your secrets and data and strategies. Because of this, an acquisition is a mutually beneficial arrangement. If you have developed a product, software or system that another company might find useful, it’s a good idea to look into acquisition as one of your options.
- Add a business partner: Another way to exit a business is to add a partner. This is a good strategy if you wish to remain involved in the business, but want to remove yourself from some of the duties you’re currently carrying. Adding a partner is not typically a good solution for a company that is declaring bankruptcy, but is more for businesses that are profitable and growing. This is a strategy for an owner to step down from the duties required in running a business and get some help. Consider this option if your business is in good shape financially, and you are ready to pull back on some of your day-to-day responsibilities.
Chelsea Levinson earned her B.S. in Business from Fordham University and her J.D. from Cardozo. She is a small business owner who has created content for Bank of America, H&R Block, CNBC, AOL and many more.