Understanding the liquidation process

Liquidation is the process by which stores sell off their assets, including inventory, furniture, and equipment, to convert them into cash to pay off creditors or to close down the store. There are various reasons why a store may decide to liquidate its products, such as a business failure, bankruptcy, or the need to clear out excess inventory. In this chapter, we will discuss the reasons for liquidation, the different types of liquidation, and how the process works.

Why Stores Liquidate Products:

There are several reasons why stores may decide to liquidate their products, including:

1. Business Failure: A store may liquidate its products if it has failed to meet its financial obligations, including rent, salaries, and vendor payments. The store may not have the cash flow to pay its bills, and liquidation may be the only way to pay off creditors and shut down the store.
2. Bankruptcy: Stores may also liquidate products in the event of bankruptcy. In the case of Chapter 7 bankruptcy, the store must liquidate its assets to pay off its creditors. In the case of Chapter 11 bankruptcy, the store may liquidate products as part of a restructuring plan to get back on its feet.
3. Excess Inventory: Stores may decide to liquidate products if they have excess inventory that they are unable to sell. Liquidation may help the store recoup some of the cost of the inventory and clear out space for new products.
4. Seasonal Products: Stores may also liquidate products at the end of a season to make room for new products. For example, a store may sell off winter coats at the end of winter to make room for spring clothing.

How Liquidation Works:

The liquidation process is typically overseen by a third-party liquidation firm, which is hired by the store to manage the sale. This firm is responsible for setting prices, managing inventory, and ensuring that the sale runs smoothly. During the liquidation sale, prices on merchandise are gradually reduced over time, starting at a relatively small discount and increasing as the sale progresses. The longer liquidated products go without being purchased, prices are often marked down even further to clear out remaining inventory.

Big box stores such as Wal-Mart, Target, Best Buy, and others, generally maintain years-long contracts with a single liquidation firm. These contracts can require hundreds of millions of dollars of the liquidation company’s funds to be held in escrow, to ensure that certain minimum pricing returns from liquidated overstock products and returns is recouped throughout the year. In the liquidation industry, these businesses are called contract holders. They hold a contract with a major brand. They typically sell liquidated products at the lowest prices available, but only sell by the truckload, and may sell many dozens or hundreds of truckloads of liquidated product a day. Contract holders generally are not open to the public, do not sell single pallets of items, and rarely advertise. It can be immensely difficult for a new business or individual to purchase liquidated products from contract holding companies, who need to move product in such volume that they in turn generally only seek to do business with individuals who will buy multiple truckloads of product each month.