The main objective of a business is to increase market share and profitability. They use multiple management and marketing strategies to achieve their goals. Sometimes, things don’t go as planned. When things don’t work out, they pull out their resources to minimize the losses.
Today, we’ll discuss liquidation strategy, its types, and pros and cons.
Table of Contents
What is a Liquidation Strategy?
A liquidation strategy is a closure strategy when businesses sell their assets in order to wind up their business operations. Many business experts consider it an unpleasant strategy because you terminate the business operations permanently.
For instance, a retailer has had heavy losses in the company and he couldn’t find any suitable party to buy the whole business a complete entity. Therefore, he decides to sell off all the assets like doors, equipment, fixtures, and inventory to extract some value out of the business and minimize the losses.
Liquidation is a difficult strategy for businesses because it has severe results like permanent loss of employees, negative market image, loss of future opportunities, and others. Usually, small businesses and partnerships result in the form of unpleasant liquidation rather than big companies.
Liquidation as an Exit Strategy
Liquidation means selling your assets and closing down your business. Businesses and companies use this strategy when they can’t sell off their business in any other way. It’s because of the many reasons that poor performance, lack of leadership, or over-reliance on few employees.
The return in the liquidation as an exit strategy is low, your worth and healthy client list won’t add an additional value to the sale. Therefore, businesses should prefer restructuring the business, instead of selling off to earn more value.
Bankruptcy vs Liquidation
Bankruptcy is for individual persons and liquidation is for companies. However, bankruptcy is a legal term when the law declares an individual person insolvent because it can’t pay its debt. Liquidation, on the other hand, is the company’s decision and strategy to shut down its business operations.
Bankruptcy and liquidation both are the same because businesses and companies can’t pay off their debts in both cases. Liquidation refers to the business operations of the company and bankruptcy refers only to the individual persons.
However, it’s worth noting it here that the period of bankruptcy is only for three years. Whereas, liquidation means that you permanently sell off the business. Bankruptcy happens because of insolvency, and liquidation occurs due to insolvency or many other reasons.
Types of Liquidation
Some of the main types of liquidations are as follows;
Compulsory Liquidation
When a company couldn’t pay its debt to the creditors, then the creditors would have no other choice but to sell off the assets to wind up everything.
If the owner can’t pay its debt before the court date, then the law would get involved and freeze the company’s accounts. It would forcefully liquidate the company’s asset and distribute it between creditors. The legal term for compulsory liquidation is “Winding-up Petition” (WUP).
Voluntary Liquidation
When a company isn’t in a position to pay off the debts and the shareholders and partners are well aware of the company’s financial health. They order the practitioner to sell off the assets and close down everything.
The liquidating person manages the liquidation process of the business. That’s why many people prefer voluntary liquidation.
Company Liquidation
Company liquidation is a formal agreement with the creditors of the company. If a majority of creditors, approximately 75%, agree to the arrangement, then it would help you to secure the deal.
It doesn’t matter if some members don’t agree to the terms and conditions of the arrangement. The law bounds them to honor the deal, and they will get their money back.
Reason for Company Liquidation
Businesses and companies liquidate their assets and business operations for various reasons and they’re as follows;
Trading Insolvent
Your business isn’t going well and you notice that your business doesn’t have enough resources to pay off the debts. Now, you’re thinking about voluntary liquidation. Because if you keep on incurring debts; then it won’t end well.
Protection
If your business has reached the stage of insolvent; and all your efforts failed to protect it from incurring debt. As ahead of the organization, you’re well aware that if you don’t liquidate the asset of the business, then it would attack the personal asset of the owners, partners, and shareholders.
Freedom of Choice
If the continuous debt is increasing and causing you anxiety, depression, insomnia, and prolonged stress, then you should liquidate your business. It’s because health is more important than wealth.
Advantages of Liquidation
- High margin revenue and the customers would stop following you to pay for the claims.
- It would lift the legal debt pressure of the business, not the personal debt pressure.
- If goes for liquidation, it would remove the responsibility of dealing with creditors; it won’t affect the personal commitment that you made with creditors.
- It allows owners to start another business or employment.
- Employees are eligible to make a claim about redundancy from the government funds, pay notice, holiday pay, unpaid salary,
- You don’t have to pay any business revenue taxes after the liquidation.
- It lifts all the management responsibilities from the directors.
- In case of creditors are putting more pressure, liquidate your business, and creditors would deal with the practitioner.
Disadvantages of Liquidation
- Liquidation doesn’t impact and change the personal credit limit, and the financial information would be available at the company’s house.
- Personal credit could put you in trouble.
- It won’t help you to recover the tax losses.
- The management and administration staff would pay more attention to the creditors because of the money pressure.
- You would lose trade license, company’s goodwill, and assets.
- Creditors and suppliers would lose their capital and investments.
- Owners may have to repay their personal loans.
- Shareholders would have to repay illegal profit which they have taken off the books.
- Many people would lose their employment, whether they’re employees or owners.
- The company can’t use the same name to conduct any type of business activities.
