Definition: The steps a company takes to go out of business, including selling of the company’s assets, paying off those that are owed money by the company, and paying the shareholders any money that may be left over.Example: LIQ Corporation is having difficulty surviving. It doesn’t have the talented employees and money it needs to develop a new generation of products to keep up with competitors. It has $5 million in assets such as its inventory, computers, copiers, desks and chairs. It also has $10 million in liabilities consisting of loans to its bank, rent owed to the landlord, and other bills from businesses that have supplied the company various supplies and services. The owners decide to liquidate the company before things get worse. The assets will be sold (ie, liquidated), giving the company $5 million in cash. The suppliers and creditors will be paid on average half of what they are owed. They will receive .$50 for each $1.00 they are owed. Because LIQ was unable to fully paid its creditors, the shareholders will get nothing.
Investeach explains: The decision to liquidate, to call it quits, is a difficult one. Usually, it’s not the company itself that initiates the process, but one of the businesses the company owes money to. By forcing the closing of the company and sale of its assets, these businesses will finally be paid at least a fraction of what they are owed.
Riddle me this:
1. What business and competitive conditions would cause a company to liquidate?
2. Among the creditors and shareholders, which has the higher payback priority?
3. In what situation would creditors not be fully paid what they’re owed?
4. What is the minimum amount of money that the shareholders may receive in liquidation?