Liquidating remaining company assets represents one of the most important components of the business termination plan. Not only is the cash raised critical to getting creditors paid off, but hidden values and risks lurk behind the scenes. Below figure presents an overview of the major asset types owned by a business and the hidden value and potential risk for each type. This asset liquidation overview is in no way meant to be all-inclusive, but highlights the issues present when a termination effort is underway. The figure only scratches the surface. Many other issues (both positive and negative) surround each major asset type. Because each business is unique, different issues will undoubtedly be present that offer additional value enhancement opportunities while opening up the company to potential risks.
Asset Liquidation Overview
A. Cash & Cash Equivalents
- Potential Hidden Value: Old outstanding checks never clear the bank and possibly could be recovered back into the company’s general account.
- Potential Risks: Unprotected blank checks may be stolen, forged, and cashed. Protection of all bank documents and items is extremely important in a termination.
- Potential Hidden Value: An old account written off as worthless via the customer’s bankruptcy may still have some value. Assigning this to a creditor in exchange for a cash payment may be possible.
- Potential Risks: The company’s customers become aware of the termination and elect to string out payment in hopes of having to avoid making full payment. Who’s going to
collect the money if nobody’s around?
- Potential Hidden Value: The shelf space the company’s inventory occupies may have value to another business looking for additional exposure in a certain retail environment.
- Potential Risks: Disposing of old, worthless, and/or unwanted inventory may be costly and contain potential hazardous material problems.
D. Property, Plant & Equipment
- Potential Hidden Value: Packaging up a group of fixed assets at a discount may provide the opportunity for the company to rid itself of an office lease with a personal guarantee. That is, the assets are sold below value, but a significant liability is also eliminated (not to mention the company does not have to move the assets now).
- Potential Risks: Selling tangible property such as desks, furniture, fixtures, computers, and so on may trigger a sales tax obligation which needs to be remitted to the appropriate parties. Also note that property, plant, and equipment may have a secured lender attached thus restricting the ability to liquidate these assets.
E. Intangible Assets
- Potential Hidden Value: Customer lists, databases, and similar types of information may have significant value to certain third parties. Marketing of these Intangible Assets holds the potential of raising additional cash.
- Potential Risks: Allowing management and/or insiders to acquire databases and other key information without consideration may trigger a potential claim of wrongdoing by creditors or equity investors.
F. Other Assets — Prepaid, Deposits, Loans Receivable, etc.
- Potential Hidden Value: Prepayments for rent, insurance, advertising, and similar items offer an opportunity to recover cash for the unutilized time period.
- Potential Risks: Terminating insurance coverage too early may leave the company’s assets exposed to potential third-party claims.
Asset Liquidation Checklist
Here’s a checklist for asset liquidations:
- Ensure that the company has as complete and comprehensive asset listing as possible. This step ensures that management has a solid starting point on how to manage the disposition so that it can allocate resources to the most valuable assets (to increase values) and avoid wasting time on assets with little or no value.
- Remember that a number of intangible assets may be present, whether or not a cost is stated on the balance sheet. These assets may include customer lists, trade secrets, sales databases, a below-market transferable property lease, and even the company name or Doing Business As (DBA) names. Don’t underestimate the potential to realize value from
- The potential for fraud, theft, or misallocation of assets is high in a business termination. Certain items, such as new computers, tend to “walk away” when management isn’t paying attention. Proper safeguarding, such as making sure that all items over $1,000 are locked in a separate area, needs to be a priority.
- Ensure that all material transactions to liquidate assets are based on arm’s-length transactions with fair market value received. Company insiders sometimes have a tendency to secure certain assets (with the idea of starting a new business) without considering the legal and fairness requirements of the situation. You can be assured that if the dollar amounts are large enough, the creditors and equity investors will pursue any transaction that smells of a related party or insider deal.
- Take advantage of experts, such as liquidators, commercial real estate brokers, or investment bankers, to enhance the value of the assets being disposed. Even though added costs are present, the extra value obtained via their marketing knowledge and muscle may be more than enough to offset their costs.
- Document all asset sales transactions appropriately to ensure that future disclosures and accounting are completed correctly. For example, if inventory is liquidated to a reseller, then no sales tax is due because the sale is from one business to another business. However, if inventory is sold at a bargain price to company employees — a business to end-user sale — then you need to collect sales tax.
- The ultimate value of an asset is really based on nothing more than its future cash flow. If other businesses are willing to buy a used computer for $250, then that amount is the value of the computer. If a patent generates a small royalty each month, then the future value of this royalty stream (discounted at the appropriate rate) represents its value. Similar to valuing and marketing a business for sale, anything that enhances an asset’s future cash flow increases its value today.
Officers, executives, and other parties retained to terminate the business have a fiduciary responsibility to the creditors and equity investors to maximize the value of the assets being disposed. In today’s highly fraud- and corruption-sensitive environment, creditors and investors are looking for ways to recapture losses even if it means piercing the corporate entity and pursuing key parties at the individual level.