Introduction
Running a business is an ongoing exercise in planning, forecasting, and mitigating risk. Yet, one of the most critical- and commonly overlooked- planning areas is preparing for the unexpected. Whether it’s a sudden disability, untimely death, or financial collapse, an unplanned business liquidation can dismantle years of hard work and strip a company of its long-term value. Without a proactive plan in place, the burden often falls on grieving family members, overwhelmed business partners, or creditors, all trying to piece together what’s left.
Unplanned liquidations are rarely orderly or efficient. They often result in the sale of assets at fire-sale prices, the loss of goodwill, and the erosion of the business’s legacy. While liquidation might be necessary in some cases, especially in insolvency, more often, the steep costs associated with a forced shutdown can be avoided with thoughtful succession planning and timely risk management. Understanding what’s at stake and taking early steps to plan for contingencies can make all the difference for the business owner, their loved ones, and their employees.
What is it?
Unplanned business liquidations typically occur when a sole owner suddenly becomes disabled or dies and does not have an effective succession plan in place. If there is no one to step in and maintain the business as a going concern, then a liquidation may be the only choice. Unplanned liquidations may also occur when your company becomes insolvent and your creditors file a petition in a federal bankruptcy court requesting that your assets be liquidated to satisfy debts.
Generally, liquidation is a worst-case scenario. When your company is forced into an unplanned liquidation, you will lose the business’s going-concern value. This can be devastating to you and/or your heirs.
Why do you lose so much in a liquidation?
You sacrifice the goodwill value of the business
Your business’s goodwill consists of your reputation, your good name, your customer relations, your employee relations, and other such intangibles that make your business more profitable and therefore more valuable. In an unplanned liquidation, you will almost certainly sacrifice goodwill, which typically has no independent market or liquidation value. If you can find buyers interested in exploiting the company’s name and reputation, they are unlikely to offer a defunct (or soon-to-be-defunct) business much for the privilege.
Hard assets are sold at forced sale prices
Assets such as equipment, real estate, inventory, fixtures, furniture, and vehicles all have a value. In most cases, these types of assets can generate more sale proceeds when properly packaged and marketed.
In unplanned liquidations, assets are frequently sold piecemeal at an auction, with little or no effort put into packaging and marketing. A newspaper article announces the auction sale, and local buyers show up looking for bargains. In this type of liquidation, you are usually lucky to get what you can for the remains of your business. Even if you can arrange a private sale on short notice, buyers are likely to offer only slightly more than what you would get at auction.
Accounts receivable drop in value
Accounts receivable are harder to collect after your company has gone out of business. Customers tend to believe that if the creditor no longer exists, then there is no reason to continue paying on the account. It may take you several months to find a buyer for your accounts receivable. By that time, your customers may have assumed that the debts have been extinguished. When an unknown party shows up and demands payment of your accounts receivable, customers often become suspicious and resistant to collection efforts. This means a smaller percentage of your accounts receivable will be collected, and the buyer will have to spend more time and effort doing it. Faced with these complications, the sale of your accounts receivable will likely require a severe discount on their value.
How do you avoid an unplanned liquidation?
You avoid some types of unplanned liquidations with succession planning and short-term contingency planning. Proper succession and contingency planning protects your retirement income, protects you in the event of disability, and protects your heirs upon your death. A good plan will provide for the smooth transfer of control and ownership of your business upon any one of a number of triggering events. A good succession plan will also preserve the going-concern value of your business.
Conclusion
Unplanned business liquidations represent the most disruptive and value-destroying outcomes for any business. Without a clear plan in place, the liquidation process can erode not just hard assets, but also the intangible value you’ve worked a lifetime to build—your reputation, customer relationships, and brand equity. When creditors, courts, or grieving families are left to pick up the pieces, your business is reduced to whatever can be salvaged quickly, often at a fraction of its true worth.
Fortunately, this outcome is avoidable. Whether you’re a sole proprietor or run a multi-owner enterprise, investing in succession and contingency planning can protect your business’s continuity, preserve its market value, and provide clarity in times of uncertainty. Planning doesn’t just protect your wealth, it protects your employees, your legacy, and your family’s financial future. Start the conversation early, update your plans regularly, and don’t wait for a crisis to realize how much you had to lose.
Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
