An Original Article from Small Business Administration (SBA.gov)
If you have decided to get out of business and are not able to pass your business on, merge it with another business, or sell it as a going concern, liquidating the assets could be the most appropriate exit strategy. However, before you terminate your lease, sell a key piece of equipment, or disconnect your utilities, make sure you have a well thought-out plan. If you determine that liquidating your assets is your best course of action, follow these key steps.
Talk to your lawyer & accountant
The information on this site is intended to provide you with a general overview of the liquidation process. It is not a substitute for case specific advice that only your lawyer and accountant can provide.
Also remember that you will need the cooperation of your creditors. Once you have developed a plan, present it to them and get their permission before you act. As long as you are candid and have a formidable plan, they will most likely go along with it.
For more information related to liquidation planning, you should review the FTC’s Internet Auction Guide. This document by the Federal Trade Commission (FTC) explains how Internet auctions work, and is essential reading if you’re considering this course of action. To help you find a professional auctioneer in your area to conduct your sale, go to the National Auctioneers’ Association.
Scrutinize your assets: inventory, assess, & prepare each item for sale
Begin by preparing a current inventory of your business assets. Try to include photographs, serial numbers, and a brief description of the condition of each item. Your inventory will save you considerable time and expense as you move through the sale process and will be invaluable if you are later asked to explain the sale to your creditors or the Internal Revenue Service (IRS).
Next, start preparing your assets for sale. Don’t risk diminishing the appeal of your marketable items by keeping outdated or worn-out equipment, furniture or inventory. Their primary value is in the form of a tax deduction, so why not donate them to an appropriate charity?
If necessary, wash, paint, or repair the items you intend to sell. Make sure your business premises are neat and clean if the sale will be held there.
Be able to demonstrate your equipment. Have the warranties and repair records available for inspection.
Don’t scare buyers away. If hazardous waste products, such as used chemicals and batteries, are stored on your business premises, contact your local Department of Ecology for a list of companies that purchase these items. If they can’t be sold, dispose of them properly.
If you have items that are leased with an option to purchase, don’t just turn them back in. Find out how much is owed. You might be able to pay off an item, such as a forklift, for a few hundred dollars and sell it for a few thousand.
If you have attractive items on consignment or with high residual lease balances, you might want to ask the owners to include their items in your sale. It will save them the hassle and expense of moving them, and you will have someone to share the costs of the sale with. Their big-ticket items may even help you attract more buyers.
If your business premises are leased and you have trade fixtures or other items attached to the real estate, make sure they are worth more than the cost of repairing the damage done by removing them. Inquire about your landlord’s plans for the premises. The new tenant or your landlord may be interested in buying your items or including the items in your sale.
Finally, don’t overlook your intangible assets. For example, is your lease assignable? Are the business licenses, permits, patents, or trademarks that you hold in demand? Can they be transferred? Is there a market for your customer list, contract rights, or accounts? You may wish to check with your attorney or accountant.
Secure your merchandise
If your customers or employees will be disgruntled when they learn that your business is closing, consider collecting the keys, changing the locks, or hiring a security guard. You won’t be able to recover any of your investment if the items you’ve invested in are no longer around.
Establish the liquidation value of your assets
Liquidation value refers to the amount you can expect to recover in a forced sale situation. Generally, this amount is at least 20 percent less than retail value. To establish the liquidation value of your assets, work with a qualified appraiser. Obtain a written liquidation value appraisal before you entertain any offers.
Study the appraisal well before you make any significant decisions concerning your sale.
Make certain that a sale is worthwhile
Once you have your liquidation value appraisal, estimate your net sale proceeds. Remember to deduct all of the costs of the sale. These include items such as commissions, advertising expenses, moving and storage costs, labor expenses, credit card discounts, rent and utilities. Also deduct amounts that are secured by liens on your assets such as rent, delinquent personal property taxes, and loans owed to secured creditors.
If a liquidation sale doesn’t look worthwhile after you’ve done your calculations, talk to your attorney. There may be more appropriate exit strategies for you to pursue.
Choose the best type of sale for your merchandise
If a liquidation sale looks worthwhile, the next step is to decide what type of sale to hold. One, or a combination of several, of the following types of sales may be appropriate.
Negotiated sales in a distress situation are desirable but uncommon. Logical buyers include your competitors, customers, suppliers and landlord. For example, if you own a restaurant, your landlord may be interested in purchasing your equipment so that the premises can be rented to a new operator at a higher rate.
Consignment sales are appropriate when time is not of the essence, your assets are easily movable, and there is a local dealer specializing in the type of items you want to sell. If you choose a consignment sale, you will need to turn your assets over to the dealer, who will sell them and pay you an agreed-upon amount following the sale.
Internet sales are rapidly growing in popularity and importance. Before deciding whether to sell online, familiarize yourself with the rules and your legal obligations as a seller by reading the FTC’s Internet Auction Guide. You may also want to consult a traditional auction company, since many are now able to accommodate simultaneous in-person and online bidding.
Sealed bid sales are appropriate when confidentiality is important. All the bids are submitted in sealed envelopes that are opened at the same predetermined time and place.
Retail sales, also known as Going-Out-of-Business Sales, are appropriate for consumer items like small appliances, gifts and gadgets. They are also a good way to sell shoes and clothing, since people don’t like to buy these items unless they can try them on first.
A retail sale followed by an auction works particularly well for some businesses. For example, if you are trying to close a grocery store, you can start with a retail sale to dispose of the food, and follow it up with an auction to dispose of the shelving, freezers, cash registers, shopping carts and other miscellaneous items.
To protect consumers from unscrupulous retailers who falsely claim to be going out of business week after week and year after year, many states now regulate Going-Out-of-Business Sales. If you want to conduct such a sale, be sure to research the law in your area.
Public auctions are appropriate for most business assets. Typically, your property is sold item by item to the highest bidder. You may, however, also be able to take advantage of the aggregate bid process, which can result in a considerably higher sales price. This works particularly well if your landlord is willing to prequalify the bidders as tenants. For example, suppose you want to sell a laundromat. Each washer and dryer can be auctioned separately, the individual bid prices totaled, and the bidding reopened on all of the items for an amount that is higher than the aggregate amount of the individual bid prices.
The aggregate bidding process also works on a smaller scale. For example, a bulldozer can be auctioned separately from its ripper. The bids can then be totaled and the machine and its attachment offered as a package subject to a minimum bid higher than the aggregate amount of the individual bid prices.
Select the best time for your sale
Begin with the season, then select the best day and time to hold your sale.The season should be appropriate for the type of merchandise you want to sell. Snow-blowing equipment, for example, will sell better in December than it will in July.
The day of the week and time should be convenient for the customers you’re hoping to attract. For example, few contractors will leave a job site in the middle of the day during their workweek to attend a liquidation sale, but if you schedule it for a Saturday morning, they’ll be there. Similarly, hair salons and restaurants are typically open on Saturdays, but closed on Mondays. Make it easy for the owners of these businesses to attend your sale by scheduling it on a Monday.
Of course, you also need to take your marketing plans into account. Find out when the trade journals you want to advertise in are published and how much lead time they’ll need to include your ad.
Arrange to hold your sale at the most appropriate location
The location of your sale can have a significant impact on your net proceeds. Choose it carefully, based on what you’re trying to sell. While construction equipment, cars, trucks, snowmobiles, and lawnmowers can be moved and sold just about anywhere, other items should be sold in place. Restaurant equipment, for example, can drop as much as 50 percent in value if moved.
As a general rule, it is best to hold your sale on your business premises. From a marketing perspective, most items look best in the surroundings where they are used. Some, such as you’d find in a machine shop or a sawmill, have special voltage requirements. Your business site is wired to accommodate them; most storage warehouses aren’t. Keep in mind that prospective buyers are unlikely to buy equipment they can’t test unless they get a large discount, and moving and storage costs will reduce your net recovery.
Sometimes, a poor landlord-tenant relationship can prevent a business owner from obtaining permission to hold an on-site sale. If you find yourself in this situation, don’t give up. Your auctioneer or attorney may be able to obtain your landlord’s cooperation.
Finally, in exceptional circumstances, the best place for your sale may be somewhere other than where your assets are located. This is particularly true when they are impractical or impossible to move, such as a cruise ship or a mountaintop resort, and interest in purchasing them extends to other areas of the country. In these cases, you may be able to recover more by selling them in absentia. For example, a fish cannery located on a small island in the Aleutians could be sold in Seattle by utilizing a video presentation. Bids could be taken in person in Seattle, at the cannery, over the telephone, and via the Internet.
Hire an expert to conduct your sale
The right expert can ensure that you get the highest possible dollar return. To choose the right expert, analyze your assets. Then, determine who–an auctioneer, a dealer, a broker, etc.–has expertise in each category of assets you want to sell. If you are not sure where to start, ask your banker, lawyer, and business associates for recommendations.
Use a non-recourse bill of sale
The professionals you’ve hired should take care of the paperwork required to transfer title to your assets. Nevertheless, double-check to make certain that each bill of sale states that the item was sold “As is, Where is.” You are probably looking forward to retirement or starting a new business. Why risk entanglement in long, drawn-out disputes over implied warranties of merchantability or fitness?