45% of small businesses fail by their fifth year in business. When this happens, what can business owners do? Their best strategy may be to gather up what profits they can, pay off their creditors, and leave.
Liquidation sales can net business owners some profits where they may have thought there were none. If your business is failing, a liquidation sale may be the best exit strategy for you. Read on to learn if your failing business should hold one.
What Is a Liquidation Sale?
During liquidation sales, businesses wish to quickly sell a large amount of stock and assets to consumers. They often sell these items at a heavily discounted price. These prices will continue to decrease as the sale drags on.
Business owners likely won’t make back what they invested by doing this. But that isn’t the goal of a liquidation sale. The goal is to spend a short time getting back as much money as possible.
Business owners can often keep the money that they make from the sale. In other situations, business owners can’t do this. They need to use the money to pay off their debts.
Why Hold a Liquidation Sale?
A liquidation sale isn’t necessarily a bankruptcy sale and/or a store closing sale. Business owners don’t always liquidate assets or have their assets liquidated after going out of business. This process can also be the best choice in many other kinds of situations.
A business owner will often hold a liquidation sale when they can’t stay on top of their expenses. They will sell off all the assets they can and pay off their creditors. They may not need to shut their business down afterward, but they usually have to do this.
If a business owner has declared bankruptcy, the court may call for a liquidation bankruptcy sale. If so, the business owner must turn their business’s remaining assets over for liquidation. A court-appointed bankruptcy trustee will then hand the money this sale makes back to creditors in order of priority.
Clearing Excess Inventory
Sometimes, businesses will have to deal with an excess amount of stock. They may have come to own this large amount of stock for many different reasons. Poor inventory management and a failure to drum up public popularity are two reasons why this may have happened.
Businesses often need the storage space that this excess stock is taking up. They may also need to quickly earn some capital. To free up storage space and/or get this needed capital, they will hold liquidation sales.
In many situations, businesses will think it best to move to another location. The process of moving can be costly and complicated. They may also find that they don’t have enough space in their new building to accommodate their assets.
These businesses should want to save themselves from high costs, headaches, and having to throw many assets away. A liquidation sale can be the solution to these problems.
Businesses often want to change the way they look and/or work. The problem is that they may still have a lot of inventory and/or equipment left over from an earlier iteration. They could just throw all this equipment away, but that would be wasteful.
They probably won’t make back what they originally paid for the items with a liquidation sale. But they should earn some capital back rather than get nothing back.
Which Businesses Have Liquidation Sales?
There are three types of businesses that resort to liquidation sales. Experts categorize these companies by the asset types they have. The assets that a business has can directly affect how much its owners can expect to make on a sale.
You may not want to hold a liquidation sale if you can’t make a fair amount with the assets you have.
Assets Used Indirectly
These types of businesses don’t sell or use their assets while making an income. They don’t necessarily need their assets to conduct business. The assets they have just enhance the work that these businesses do.
Law firms and insurance agencies are good examples of these businesses. Their buildings have fixtures, furniture, and other equipment. But they could technically ask clients to sit on the floor and still conduct business with them.
Who Is Buying
So the assets that these businesses have are limited. It will be difficult for them to gain a lot of profits from a liquidation sale. Their most interested customers would probably be used office equipment dealers.
Assets Used in Production
Businesses like these use their assets as tools to create an income. They can’t conduct business without these assets. They also don’t sell these assets to make an income.
Construction companies and manufacturers are good examples. They use their tools, machinery, and other equipment to make things for their clients.
Who Is Buying
When these businesses need to liquidate these assets, there are a few places these assets can go. Similar businesses, used equipment dealers, and industry-specific auction houses can all have an interest in these assets.
Assets Produce Income
These businesses sell their assets to make an income. They buy them for a lower price from a manufacturer. Afterward, they sell them to consumers for a higher price.
Most retail stores fall under this category. These include shoe stores, furniture stores, sporting goods stores, etc. This category can also include big retail chains, but these companies don’t have to deal with liquidation as often.
Who Is Buying
Businesses such as these can sell at least most of their assets directly to consumers. They will often be the ones putting “store closing” and “going out of business” signs in front of their stores. Customers can then come in and buy products for cheaper prices than usual.
How Does a Liquidation Sale Work?
Business owners cannot take the entire process of deciding to hold, organize and hold a liquidation sale lightly. They need to take the proper time and care to make sure that a liquidation sale is their best choice. Then they need to organize the sale so that they can gain the highest possible profits.
Business owners don’t usually decide to hold liquidation sales alone. They consult their stakeholders, creditors, financial teams, and any other relevant parties. They’ll also likely do a fair amount of research to make sure they know what they’re doing.
After these discussions, business owners will analyze and record all their assets. As mentioned above, assets include anything a business sells or uses for its business. So assets can include toys, construction equipment, packing materials, and so on.
Business owners may not have to go around looking at all of their assets, though. Good owners should keep detailed reports of all their stock. These reports shouldn’t just include the types of items, but also these items are returns, surplus, pulls, etc.
If this is the case, owners will just use their reports to learn what assets they have.
After finalizing the asset report, owners will consult with liquidation services. These services help businesses decide what prices will maximize profits. They will also help these businesses prepare their finances for the sale’s aftermath.
Liquidation services will use many informational resources to decide how to set the sale prices. Two resources they’ll draw from our liquidation data and store sales history. This information can also help a liquidation specialist estimate how long a sale will last.
Set Up the Sale
With all the necessary information in hand, owners will start to plan the sale. They will plan out their strategies and consider what type of sale they want.
For example, they can make choices between holding the sale online or in-store. They may also want to use techniques such as gifts, coupons, and offer-bundling. Such tactics can sell the highest amount of stock quickly.
Business owners also shouldn’t forget to carry out a good marketing strategy. This will inform consumers of the sale and make them want to attend.
After the Sale
Once the sale ends, any profits made need to go to the right parties in order of importance. Creditors are usually the first priority. Then the shareholders get their share, and then the government and employees.
Unfortunately, the business owner must erase all debts first. So during most going out-of-business sales, shareholders can get little to nothing.
How to Succeed With a Liquidation Sale
There are many methods you can use to make your liquidation sale a success. Consider trying the following techniques:
Do Market Research
The liquidation services shouldn’t have to do all the work. You should learn what the demand is for certain items in your area or areas you want to sell to. This can help you decide how to price your items for resellers and/or customers.
Consider Your Margins
If you’re selling mostly to resellers, consider their margins. They may not want to buy something from you if they can’t make a tidy profit from it. Consider the extra costs these resellers may have to pay over the list price as well, such as shipping amounts.
Try Selling Items Elsewhere
Are things not selling in the store? Consider trying to sell them elsewhere. There are plenty of online platforms like Facebook and Craigslist where you can put your assets up for sale.
Sell at the Right Time
The time of year when you sell your items can also affect the success of your liquidation sale. For example, if you have a toy store, you can end up selling a lot more stock around the holidays. Consult with your liquidation professional and do some research.
Make the Sale Short
You need to make the sale as short as possible. This will help you limit the amount of overhead that you’ll need to pay.
How to Find Liquidation Services
A high-quality professional liquidator should more than earn their fees. They can increase your gross sales and lower your overhead. Plus, this probably isn’t their first liquidation sale and they’ve done this several times before.
But how do you know that the liquidation service that you decide to use is a good one? Try considering the following details.
Scam companies don’t like to hand out itemized bills. These help you figure out if any of the charges they gave you are bogus. Scam companies often hand you bogus charges without you knowing.
An honest company will be more than happy to give you an itemized bill. They should also readily inform you of any hidden fees you may run into.
Look at Reviews
Look at the reviews written by the service’s past clients. You should be able to learn a fair amount about the company from these references.
But beware! Fake reviews do exist, and it’s easy to get swayed by them. Learn how to spot fake reviews so you can ignore them.
Ask for references from all the people that you will be working with. Honest liquidation services should be more than happy to tell you all about their workers’ past successes. They’ll likely talk about past clients and earlier liquidation sales successes.
What’s the best way to know if a liquidator has gone through many sales before? Ask them to give you some details about earlier liquidation sales. Your professional liquidator should be more than capable of describing an earlier sale in highly complex detail.
Get Liquidation Sale Help
A liquidation sale can be a great help for a wide variety of businesses in several situations. But business owners have to conduct liquidation sales properly. This will increase the profits they get in the end.
If you want to get more profits from a liquidation sale, engage our liquidation services. We have helped a wide variety of businesses with their liquidation needs for over 30 years. Contact us today on this page to inquire about our services.