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Liquidation sale is a financial term it pays to understand. Here’s what it means.
What is a liquidation sale?
A liquidation sale is a sale held by a company going out of business in an attempt to get rid of its remaining stock and assets. Liquidation sale discounts start at close to 30 percent and can increase up to 75 percent and more as the store nears its final days. State and local laws regulating liquidation sales do vary, and some places allow businesses to advertise “Everything must go!” sales for several years.
Companies liquidate assets when they decide to close their doors permanently because they cannot pay their bills or sell the business’ interest to other entities. The sale is the first step toward ceasing operations, and gives the business an opportunity to recoup some of the money it has invested in stock and equipment. Liquidation sales occur in one of two ways: The company sells everything to walk-in customers, or sells the entire inventory to a third party. The company stands to make more money by simply slashing prices for the public, but this approach means waiting longer to receive all its money. By selling its entire inventory at once, the company makes all its money upfront but accepts less money for the items.
Even though they want to sell all of the existing assets, including stock, fixtures, and equipment, the business owners still want to make as much money as possible. For this reason, liquidation sales can last as long as eight to 10 weeks. During the first few weeks of the sale, the business offers minimal discounts on the items. As the selection decreases, the discounts increase. By the end of the sale, customers enjoy the deepest discounts on the remaining products.
When businesses file Chapter 7 bankruptcy, they must distribute the proceeds of liquidation sales to their creditors and stakeholders. Creditors of secured loans have first priority and receive the collateral used to secure the loan. The next distribution goes to pay the government, employees, and bondholders. Shareholders split whatever remains, but in many cases they receive nothing.
Liquidation sale example
To find a liquidation sale, look for a store in your area advertising a store closing. Check the fine print on the advertisement so you know whether the prices marked include the discount, or if the store deducts it at checkout. As the sale nears its end, the store may bring in remaining inventory from other locations, and even sell the store fixtures like shelves and display cases.
Are you shopping liquidation sales to stay within your budget and maximize savings? Use Bankrate’s savings calculator to track your potential savings over the years.
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