No one ever starts a fashion business with hopes of shutting down business operations after investing a significant amount of time, money, and effort into it. Sometimes, however, this is the only option left for fashion entrepreneurs during the course of running a fashion brand.
There are many reasons you, as a fashion entrepreneur, might want to shut down your business, some of which may include stress, bankruptcy, low profits, unavailable resources, and so on.
Just as there are business growth strategies, there are also business exit strategies, one of which is liquidation.
Liquidation is a term that is used in finance and economics. According to Investopedia, liquidation is the process of bringing a business to an end and distributing its assets to claimants. It usually occurs when the business cannot pay its debts as at when due.
Liquidation may also be used to refer to the selling of poor-performing goods at a very steep discount.
As a corporate and family lawyer with Matthew Burkaa and Co., Ms Ogochuckwu Chinedu had some things to say about liquidation for fashion brands,
Liquidation is the settlement of the financial affairs of a business or individual through the sale of all assets and the distribution of the proceeds to creditors, heirs, or other parties with a legal claim.
It is a common exit strategy for small businesses as it is one of the fastest ways to close up shop. This strategy is sometimes the only option for you, as a fashion entrepreneur, in cases where the operations of your business depend solely on you and no family member can take over business operations from you.
If you decide to go with this business exit strategy, you will be closing your business and selling all assets. You also have to remember that you have to use the cash you earn from the process to pay off any debts and payout shareholders – if any.
In liquidation, you have to remember how your choice will affect your employees and customers who rely on the fashion products and service you provide.
Process of Liquidating a Company
If a fashion business has been registered as a business name or incorporated company, it can liquidate. – Ogochuckwu Chinedu.
The details of the process when voluntarily liquidating a limited company depend largely on the form of liquidation that is chosen. However, the five basic steps below are included within all of the procedures:
- A meeting is held by the company with shareholders, creditors, and board of directors.
- An Insolvency Practitioner is appointed as Liquidator.
- The company’s assets are then assessed and liquidated.
- If there are any creditors they are then paid in order of priority.
- Surplus cash is distributed to the shareholders.
- The company is finally dissolved and struck-off the CAC register.
Types of Assets that can be Sold
Depending on the size of your fashion business and how much money you have invested in it, the assets you own and can liquidate will vary. To make money from liquidation as a business exit strategy, you will have to have valuable assets you can sell at reasonable prices.
Assets can be essential tools you have that enables you to carry out your day to day operations as a fashion business and may include;
- Land (if you run a big fashion house),
- Store fixtures such as cupboards,
- Décor and decorations,
- Tools such as mannequins, irons, scissors,
- Furniture such as tables and chairs,
- Machinery such as sewing machine, generator, weaving machine,
- Office equipment,
- Packing supplies such as nylons, boxes,
- Art and other wall hangings,
- Window treatments and rugs.
The biggest downside of inventory liquidation is that, in many cases, the timetable for liquidating assets is short, so the discounts are steep and the cash earned is much lower than the retail value.
Advantages of Liquidation as an Exit Strategy
Liquidation is a good way to exit a business because it helps you to pay off your creditors after the sale of your assets. Thereby reducing the possibility having numerous suits against your business. – Ogochuckwu Chinedu.
- It is easy to do and can be one of the simplest and quickest exit strategies.
- There is no negotiation involved.
- There is no need to worry about the transfer of control of operations of your business.
- You will not have to worry about the business again as it will cease to exist
Disadvantages of Liquidation as an Exit Strategy
- It has the lowest return on investment to you. The only money you will get from a liquidation sale is from the disposal of assets.
- Most of your assets will sell at a much lower price than normal.
- You will have to severe relationships with employees, partners, clients, and anyone else that is involved with the general operations of your business.
- Creditors (if any) have the first claim on funds from asset sales.