Seeing the sign of a closing down sale or liquidation sale is not an uncommon sight in most major city shopping centres in the UK. In 2020, it is sadly a very familiar sight as many retail shops and businesses are being forced to close due to the impact of COVID-19. With many people continuing to work from home, the UK’s high streets are ‘hanging by a thread’, according to Helen Dickinson from the British Retail Consortium (BRC).

But what exactly is a company’s financial situation if they are announcing a going out of the business sale? Does it mean the company has entered liquidation or is the business just being wound up?

Going out of business sales

Seeing a company going out of business may not always mean that it is insolvent. Sometimes it is a solvent company that is deciding to close down for a reason, such as a retirement, a merger or takeover by another company, or the business is no longer required.

Whilst a solvent limited business does have to go through a liquidation process, usually, an MVL (members’ voluntary liquidation), its assets, any stock and equipment, will be sold off by the insolvency practitioner/liquidator and the proceeds will be used to pay fees, tax commitments, directors and shareholders. So, whilst it is technically a liquidation sale, most solvent companies preparing for voluntary liquidation will plan ahead and hold a going out of the business sale in order to realise the maximum value from its assets, remaining stock and equipment prior to starting the liquidation process.

An administration pre-pack sale

When a company goes into administration, it is usually insolvent and is under serious threat from its creditors. In these circumstances, the court may well appoint an insolvency practitioner as well as freeze the company’s trading and financial accounts. The appointed administrator’s aim is to sell the company within a short period of time in order to avoid the company being taken over by the administrators and the business going into liquidation.

A popular method for companies struggling is an administration pre-pack sale. Essentially, a company arranges to sell its assets to an existing third party company, or a new company altogether, prior to appointing administrators. This process has the ability to protect the business, like a business rescue, and the old company is then liquidated.

Sometimes the old business is sold to existing directors, as long as they are not subject to investigation or fraudulent activity and have sufficient funds to purchase the assets at a fair market value, for them to operate a new business.

For example, Bensons for Beds went into pre-pack administration in June this year. However, its existing owner, Alteri Investors, bought out the business straight away, investing £25 million back into the business and securing the jobs of 1,900 people. Bensons for Beds continues to trade. The group did exactly the same with another of its companies, Harvey’s Furniture.

This method is also an alternative solution if a company’s creditors are threatening to issue a winding up petition. However, a company is not allowed to enter into an administration pre-pack sale if a winding up petition has already been issued.

This form of going out of business sale is not really suitable for small companies. It is usually large companies that choose this route because not only is it a complex process, it is also costly.

There are often going out of business sales for a specific company that is part of a group. For example, although the retail side of the Oliver Sweeney Group went into administration in July this year, with seven retail stores having closing down sales across the UK, the administration process does not affect the group’s wholesale and online business.

Liquidation sales

Liquidation sales are different to going out of business sales. A company holds a liquidation sale when it is entering the liquidation process to try to sell off its assets, and any remaining stock, as quickly as possible in order to raise the funds to pay the liquidator’s fees, HMRC commitments and its creditors.

The sale of a company’s assets is a step towards business closure, before the business ceases trading, to make as much money as they can. A company’s assets in a liquidation sale are the items that the company physically owns, such as:

    • Land and property
    • Equipment
    • Office furniture and items of stationery
    • Remaining stock.

Discounts on liquidation sales can be as little as 30% initially but as it nears closure, the discount may rise to 75%. The liquidation sale can take place in a variety of places and online. Before commencing a liquidation sale, it is important for the company to prepare an accurate inventory of any assets, office equipment and furniture, as well as any remaining stock.

An independent market value of the inventory of assets should be sought prior to the sale, which needs to be evaluated with the timescale of how quickly the inventory needs to be sold. This will determine the initial level of discount the company will offer.

As for any sale, the company needs to ensure that they have marketed the forthcoming liquidation sale adequately, such as on the company’s website, across its social media platforms, in the local press, and national press if applicable, as well as displaying posters throughout the area. If there are any specific clients or businesses to be targeted, ensure that they have been notified directly.

There are advantages to liquidation sales including:

    • They allow for more time to hold a liquidation sale and source the best purchasers
    • They allow the sellers to more time to find the right buyer, which can lead to higher prices
    • They allow for negotiation between the seller and the buyer to determine the assets up for sale
    • They work better for companies that have assets of a more specialised nature where buyers may be more limited.

However, there are also disadvantages. Any equipment or stock will have to be stored until they are sold, which carries a cost. In addition, any payments for mortgage, facilities, security and property taxes will have to be paid until the land or property is sold.

If you are planning on liquidating your company and are considering holding a going out of business or liquidation sale prior to winding up the company, the first step is to seek professional advice. Our highly experienced professionals at Leading UK are on hand to help and advise on the process. Call us today on 01603 552028 or visit our website on Leading UK.