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What is Liquidation?

By Brendan McGuigan
Updated May 17, 2024
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Liquidation is the process of taking a business' real assets and turning them into cash, either to pay off debt or to reap a personal profit. Liquidation may be done either voluntarily by a company or individual, or in response to a declaration of bankruptcy as a way of repaying a portion of debtors.

Compulsory liquidation is ordered by a court, and the laws vary in different countries. Usually a court-appointed receiver takes over to analyze the company's assets and determine the best way to handle them. Originally, recovered cash from a compulsory liquidation was distributed evenly amongst debtors. Now certain debtors may take precedence over others, depending on the terms of the loans.

Voluntary liquidation may be done for a number of reasons. Some companies elect to undergo liquidation while their assets still outweigh their liabilities, if they believe their business will continue to degrade. By selling off assets early, these corporations may pay off debtors and still give a final dividend to shareholders.

A corporation with liabilities outweighing assets may also undergo voluntary liquidation, expecting a compulsory liquidation should they fail to pay off a significant portion of their debt. This type of voluntary liquidation is considered an appropriate response to an insolvent situation.

Lastly, a recently acquired corporation may undergo voluntary liquidation as a way for the investment group in charge of the takeover to realize immediate profits and to pay off their high-interest bonds. This technique is often referred to as asset stripping, and is looked upon as an incredibly hostile technique.

The costs of liquidation are normally taken directly out of the company's assets. These costs include advertising for the sale of the assets, insurance to cover the sale, a direct fee to the liquidator, and costs for disbursing assets to purchasers.

There are many large liquidators throughout the world who handle liquidations, as well as secondary-liquidators who specialize in buying out large amounts of equipment from top-tier liquidators, and then reselling them on a consumer level. These secondary liquidators often operate on the Internet, and either operate through auction or set prices far below market value.

Liquidations are often a wonderful source of new equipment and materials for start-up companies or companies looking to expand their business. The cost of equipment in a liquidation auction can be anywhere from half to one-tenth the price of the same equipment purchased through a mainstream distributor or auction house.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
By anon47141 — On Oct 02, 2009

people should consider strategizing, to be pro active instead of being reactive to avoid liquidation.

By anon12515 — On May 08, 2008

why does liquidation usually result in loss for the owners or creditors or the both?

By anon1347 — On May 26, 2007

How long does the liquidation process normally take?

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