How Do You Liquidate?
Liquidate refers to selling real estate or other assets on the open market to convert them into cash or cash equivalents. Similar to closure, liquidation divides a company’s assets among claimants.
Asset liquidations can occur voluntarily or involuntarily. Voluntary liquidation may be implemented to raise funds for fresh investments or purchases or to close out existing positions. When an entity decides to convert assets into a liquid form (i.e., cash) or is compelled to do so by a court order or contract, this process is known as forced liquidation and can be applied in bankruptcy operations.
Selling off inventory, typically at substantial discounts, is also called liquidation. A corporation may decide to liquidate inventory to make room for fresh things; thus, filing for bankruptcy is not necessarily required.
Knowing How to Liquidate
When an investor sells their investment in an asset, it’s known as liquidation in the investing world. When a portfolio manager or investor needs cash to reallocate money or rebalance a portfolio, they typically liquidate an asset. A poorly performing asset may also be liquidated entirely or in part. Investors may sell their assets if they require money for other non-investment-related reasons like bill payments, travel expenses, automobile purchases, tuition, etc.
Financial advisors typically consider an investor’s investment goals and time horizon when assigning assets to a portfolio. An investor hoping to buy a house within five years can hold a portfolio of stocks and bonds intended for liquidation within that time frame. A down payment on a house would then be made with the cash proceeds. When choosing investments expected to increase in value and safeguard the investor’s wealth, the financial advisor would keep that five-year deadline in mind.
Profit Calls
In the case of an unmet margin call, brokers have the right to require some clients to sell their securities. This is a request for additional funds made when investment losses cause a margin account’s value to fall below a threshold that their broker has set.
A broker may liquidate any open positions to restore the account to the minimum amount if a margin call is not satisfied. Without the investor’s consent, they could accomplish this. The broker may only sell stock holdings in the required amounts if they inform the investor.
Moreover, the broker may assess a commission to the investor on these transaction(s). For any losses incurred throughout this process, this investor is liable.
When Businesses Sell Their Assets
In the business world, asset liquidation is typically done as part of a bankruptcy proceeding. However, companies can still sell assets to raise cash even when they are not experiencing financial difficulties. If a business is deemed insolvent after failing to pay creditors because of financial difficulties, the bankruptcy court may mandate an orderly asset sale.
The secured creditors would acquire the assets pledged as collateral before loan approval. The money left over after liquidation would be distributed to the unsecured creditors. The shareholders will get payment based on the percentage of shares each owns in the bankrupt company, provided there is any remaining cash after all creditors have been paid.
Insolvency is not always the cause of liquidation. Voluntary liquidation is a corporation’s process when its shareholders decide to close it down. When shareholders feel the company has fulfilled its objectives, they petition for voluntary liquidation. The shareholders gather the company’s assets and designate a liquidation. The liquidator then proceeds to sell the assets, allocating the revenues to creditors and employees according to priority.
Preferred shareholders receive their portion of any remaining funds before regular shareholders do.
What Does a Company’s Liquidation Mean?
A corporation that wants to dissolve its debts and liabilities by selling off all the assets shown on its balance sheet is said to be liquidating. It is the procedure for closing a business and allocating any leftover assets to its creditors and stockholders, assuming any survive.
If a business is insolvent, has a lot of debt that it cannot pay off, or can no longer satisfy its financial responsibilities, liquidation can be the wisest course of action. If the company is losing money and there are no chances to turn it around, it can also be the best course of action, such as filing for Chapter 7 bankruptcy.
What Remains for Shareholders and Employees in a Liquidated Company?
A liquidated company stops operations, frequently resulting in job losses for its staff. They would, however, still frequently be entitled to receive outstanding salaries and other benefits that are contractually owed to them; these would be paid from the liquidation’s revenues. While receiving these unpaid earnings, employees may be eligible to file a government unemployment claim in some circumstances.
Preferred shareholders receive payment from the liquidation proceeds after creditors in the order of priority when a corporation files for bankruptcy. Common stockholders will get what’s left over once both groups are complete. Usually, this isn’t very important, if anything at all.
Why would a person sell their assets?
Selling off goods like real estate, stocks and bonds, collectibles, and personal possessions to raise money or pay off debts is known as liquidating personal assets. It is a means of swiftly obtaining capital to fulfill financial commitments.
Suppose a person is experiencing financial troubles due to increasing debt, losing their job, or unanticipated massive obligations like emergency medical needs. In that case, they may need to liquidate their possessions. Additionally, liquidation can be required in the case of a divorce settlement or when financing a major purchase—like the down payment on a home or a business—is required. If an individual cannot satisfy a margin call, they can also be required to sell the securities they have in their brokerage account.
Where Was the Origin of the Word “Liquidate”?
The word “liquidate” has been used in various settings and in one form since the 16th century. The Latin word “liquidus,” which means “to melt” or “make clear,” is where the name originates.
Later, financial and legal experts used the phrase to describe the quick sale of assets, payment of debts, and distribution of proceeds. “Liquidate” turns assets into cash that can be distributed to shareholders or used to settle obligations.
The Final Word
Liquidate is to sell an asset(s) for cash, usually very quickly. One can decide to liquidate voluntarily to lower risk or improve their cash position, or a judge may order them to do so in the event of bankruptcy or due to a margin call in a brokerage account. Since currency is, by definition, the most liquid asset in existence, the word “liquidation” originates from this fact.
A corporation that files for Chapter 7 bankruptcy will have its assets sold and no longer exist, leaving its owners with little money.
CONCLUSION
- To unload something means to get cash for it.
- An investor might decide to sell an investment for many reasons, such as needing cash, wanting to get out of a bad investment, or combining their stocks into one portfolio.
- A person or business can be forced to sell their assets through bankruptcy or a margin call from their broker, in addition to liquidating their assets voluntarily.
