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Liquidation as an Exit Strategy

By John L. Duoba | June 29, 2012

Selling a company to an interested buyer is the method most commonly associated with getting out of a business. But for many small business owners, liquidating assets is often the best or perhaps only feasible method of exiting their businesses, especially retail businesses.

The reasons for this are numerous: Your heirs may want nothing to do with a takeover or succession plan. They have been too close to the business for years and know the 24/7/365 routine required to be successful in many small businesses. And they're attracted to the high salaries and benefit packages offered in the corporate world. Or they simply are not capable of continuing the business.

Moreover, your business is at least solvent or near-solvent, so bankruptcy is not an option. And even if you were near or at insolvency, you'd probably find it preferable to liquidate your assets and negotiate amounts owed to your creditors, while at the same time avoiding the stigma of bankruptcy.

And finally, you have come to realize that selling a business with significant assets is much easier said than done. Potential buyers are few and seldom truly serious. Most with the required assets and credit lines required to buy your business will not want to invest for the same reasons your heirs have declined the opportunity. The vast majority will not pay for goodwill or "blue sky." They will discount your inventory and pay far less than cost. Most prefer to purchase their own new assets (equipment or inventory) and start a new business rather than buy an existing one.

Liquidating Your Business

So just what is the liquidation option? It is the direct conversion of assets to cash by selling them to a user/consumer. There are generally three categories of business that will liquidate assets:

  • Businesses with assets used indirectly in the production of income -- This generally includes the furniture, fixtures and equipment (FFE) of a service business, such as insurance agencies, attorney's offices, etc. The liquidation value is extremely limited and can usually only be sold to used office equipment dealers, although an auction is sometimes viable.
  • Businesses with assets used as tools in the direct production of income -- This would include restaurants, manufacturing and construction companies. These assets can be sold to similar types of businesses, sold or consigned to used equipment dealers, or liquidated with the assistance of an industry-specific auction house.
  • Businesses whose assets directly produce income -- These are retail storefront businesses and, for our discussion, are independently owned and operated. Independent stores, apparel and shoe stores, sporting goods stores and furniture stores are in this category. (Public companies and multi-unit operations, like major chains such as Target, Staples or Home Depot, also fall into this category, but amazingly enough these companies often wait to liquidate until they are bankrupt! By liquidating their "losers" and focusing on their "winners," both large and small chains could avoid insolvency, but they usually wait until it is too late.)

Liquidating retail inventory is challenging. The entire or majority of the owner's lifetime savings may be tied up in the inventory, and converting this inventory to cash is critical to the owner's financial future.

To achieve the best results, liquidation firms are available with experience in conducting "going out of business" sales for virtually all types of retail stores. These firms are typically classified as consulting firms. And the liquidation sales they conduct may come in several cloaks: Quitting Business Sale, Total Liquidation, Going Out of Business Sale, Retirement Sale, Creditor Sale are just some of the titles associated with these sales.

As with any method of exiting from your business, a liquidation should be approached with professional assistance and some important guidelines. Most importantly, you must realize that, even though liquidating is still retailing, the strategy and techniques used are very different from that of an ongoing retail operation:

  • The sale must be as short as possible to limit overhead expenses.
  • The sale must be conducted during the proper time of the year.
  • Markdowns must be calculated for each class or department in your store. An easy but effective price markdowns method is a must. Determining the initial markdowns and the timing and amount of later markdowns is critical.
  • A promotion program must be developed that will support the actual sale and closing of the store. A detailed "A to Z" business plan must be developed for the sale.

Ultimately, there is very little information easily available to assist you in conducting a liquidation sale. Each sale is different, and textbook solutions for individual stores do not exist. For these reasons, you should consider using a liquidation consultant.

The Liquidation Professional

Using a professional liquidator has its advantages: They will (or at least should) more than earn their fees because of the increased gross sales and the lower overhead associated with their mentoring. They have liquidated several stores and this is not a first-time event for them, as it would be for you. They know how to apply initial and follow-on discounts, and develop a promotion plan to support the entire sale. Rarely does a problem arise that they can't solve.

Liquidators use several approaches. Some employ "off-the-shelf" plans that include template advertising used over and over with only a name change, and they can start a sale in a relatively short period of time. Others develop a plan tailored to fit your store; their business plan takes longer and involves a detailed analysis of your store. They may use an overall discount for the store or tailor discounts for each department. They may insist you re-price your inventory or apply a percentage discount storewide. They may charge a commission or they may charge by the length (weeks) of the sale. They may send you a package deal and never be on-site, they may be on-site throughout the sale, or they may be on-site only as required.

As when contracting with any consultant or other professional, you should evaluate each one before making a decision:

  • Will he provide references for the past three years for all sales and for the representative who will be on-site for your sale?
  • Does he tell you exactly how all aspects of the sale will be conducted?
  • Will he explain all of the details of the sale?
  • Is his business philosophy consistent with yours?
  • Do you want his organization to represent you and your store in your community?
  • Will he provide a formal proposal and projection for the outcome of your sale?
  • Are there any hidden costs?
  • Is he someone with whom you would be comfortable doing business?

Exiting your business by liquidation can be a very rewarding experience, but you must decide whether to do it yourself or hire a consultant. If you decide to hire a consultant, contact several (try searching for "quitting business," "going out of business," "business liquidation," "liquidation consultant," "exit strategies" on the Internet) and interview each of them extensively, both through written and telephonic communication as well as a face-to-face meeting. Remember, this is a one-time event and you cannot afford to make costly mistakes!

Dwight E. McCarty is president of Quitting Business Inc. and is a professional retail liquidation consultant. He may be contacted toll-free at 1-866-222-7992 or by email to quittingbusiness@aol.com. His web site is www.quittingbusiness.com.

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