In accounting, the term ‘liquidation’ means the process of liquidating a company’s assets to raise money to pay off its debtors or anyone else to whom the company owes money. In order to raise money, a corporation will typically liquidate its inventory by selling it off at a steep price. A liquidation sale typically precedes a business closing. The company is shut down once all of the assets have been sold.
What are assets?
Assets are not limited to inventory. Other company assets that might be sold off include:
- Fixtures in stores
- Tools for in-store decor
- Furniture, machinery and office supplies
- Packing materials
- Vehicles
- Other wall hangings and artwork
- Carpets and window treatments
Although not always, liquidation sales frequently take place in conjunction with a bankruptcy filing. When moving to a new location, a company could liquidate most or all of its inventory to avoid having to carry it all to a new storefront. The largest drawback of inventory liquidation is the frequent short schedule for asset liquidation, which results in high discounts and cash received that is substantially less than the retail value.
The repayment of debts
A company’s assets are liquidated or turned into cash, and the money is then used to settle its debts. However, the sequence in which creditors get paid depends on the various groups of creditors.
There are three main classes:
- Secured creditors have a lien against the company or an agreement to pledge assets as collateral for the repayment of their debt. For instance, when a business rents a car, the lender holds a lien against the vehicle, allowing the firm to seize the car if the business stops making payments.
- Unsecured creditors, such as credit card firms, are paid after secured creditors have been satisfied since they lack a lien or other security interest on any of the assets.
- Stakeholders are individuals or groups with a legitimate interest in the performance of the company but no official claim to the assets. Stakeholders include the workforce.
Creditors are paid in this order as money is received from the liquidation sale.
FAQs
What is an example of liquidation?
Selling off assets is the process of dissolving a firm and paying off creditors. A company going into liquidation would be one that sold off its stock, real estate and other assets to settle its debts and shut its doors.
What is a business's liquidation?
The process of liquidating a business entails the sale of all of its assets in order to satisfy its debts. This procedure, which may be voluntary or involuntary, is often carried out when a business is insolvent, or unable to pay its debts.
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