Liquidation in simple terms is the selling of assets to distribute them amongst stake holders. In most cases a business will only consider liquidation when their commercial entity is insolvent and can no longer sustain itself. However, at the same time many businesses consider liquidation to generate an influx of capital in order to fund a strategy. For instance, a business may decide to liquidate their current assets in order to generate enough capital to establish a new revenue stream. Each business will have their own particular reasoning behind the impeding liquidation however, generally speaking these are the most prominent reasons why a business may decide to liquidate their respective assets.
- Voluntary administration is too expensive to save the company
- The business has run out of money to pay creditors and ATO
- The business is trading at a loss or has ceased to trade
- Assets are depreciating at an alarming rate
- Inadequate resources to cover the costs of making the business viable
- Inadequate financial management
The list given above is just a glimpse into the array of different reasons why a business may decide to liquidate their worth. There are three broad categories of liquidation which can dictate the trajectory of a business’s liquidation strategies. For each type of liquidation, there are separate processes of liquidation. This is exactly why it is imperative that you should first determine your type of liquidation and apply the specific process accordingly. Here are the three distinctive types of liquidation.
ü Members’ Voluntary liquidation
As mentioned before, a business can opt for liquidation even if the business is still producing profits simply due to the discretion of the business owners. These owners might decide to dissolve the business for a variety of reasons which could be both professional and personal.
ü Creditors Voluntary liquidation
This is when the business can no longer make payments and in order to pay of its debts, the business will have to liquidate its current standing. Every shareholder will have a say in the liquidation of the business and the process will only start if 75% of votes are in favor.
ü Compulsory liquidation
Compulsory liquidation is when the business fails to make a substantial portion of its payments and the director files for liquidation through a court of law. The courts will then instruct the company to begin the liquidation process in order to pay off creditors.
Liquidation Alternative Strategies You Should Consider
Many business owners make the common mistake of assuming that they have no other option besides liquidation. In certain cases liquidation might not even help the business especially if all the assets are out dated or fixed. This is exactly why you should consider the following liquidation alternatives before you start selling your assets.
- Pre-pack Administration: This is when all or a certain portion of your businesses assets are sold to pay off debts but the business can continue operating during and after the liquidation period. Some of the assets can also be sold to the company’s directors or stakeholders, this process is also called phoenixing and is considered to be the most effective way of preserving brand identity and retaining control over the business.
- Company Voluntary Arrangement (CVA): A company voluntary arrangement can actually help your business avoid liquidation. You will need to hire an insolvency practitioner to articulate an arrangement for your creditors. This arrangement normally consists of monthly payments to creditors and assurance that they will get paid.
Benefits & Disadvantage of Liquidation
In most cases a business will have no other option but to liquidate their current and fixed assets. However, it is imperative that your team thoroughly analysis this decision from every aspect and articulates effective pre liquidation strategies which safeguard the business interests. Before you start the liquidation process or contact a Pre liquidation service, it is imperative that you understand the pros and cons of liquidating your commercial entity.
Benefits of liquidation
- No more debts after the liquidation is complete
- Relatively low strategy cost implementation
- Staff can still claim redundancy pay
- Pressure is alleviated from creditors
- Company directors can enjoy access to new funds
- Communication with creditors should improve
Disadvantages of liquidation
- All of the company’s assets will be sold
- Potential accusations of wrongful trading
- Directors loan accounts must be paid
- Employees will be made redundant
- Can potentially ruin a business’s good will
How to identify which business assets to liquidate
Identifying which assets to liquidate can be challenging, as there are so many different types of assets which can be used to generate funds. We would recommend compiling a list of all the current and fixed assets of your business. Some of the items you should include in your list are as follows,
- Real estate
- Prepaid insurance premiums
- Security deposits with landlords
- Company owned vehicles
- Office furniture
- Business equipment
- Commercial lease
- Intellectual property
- Remaining accounts receivable
- Trading which might still drive value
How to find appropriate buyers for your liquidation
Finding buyers is one of the most difficult parts of commercial liquidation as many businesses fail to find suitable buyers in the prescribed period of time. Most businesses are already working on a short time during their liquidation period and end up selling to the first buyer they come across, even at a loss. This is exactly why investing in liquidation services has become a prerequisite. These services are designed to streamline the litigation process, provide pre liquidation strategies and find appropriate buyers.
A profound liquidation service will ensure that your business is liquidating effectively while preserving the businesses brand identity. We would recommend conducting a quick search to find the most renowned pre-liquidation services in your area before you even start to liquidate your assets. A renowned company will help you evaluate your decision from every perspective and will guide you through the entire liquidation process. So if you are currently considering pre-liquidation strategies, contact a renowned service provider to stream line the entire process for you.