What Is Liquidation?
Liquidation in finance & economics is the process of bringing a business to an end & distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due.

As company operations end, the remaining assets are used to pay creditors & shareholders, based on the priority of their claims.

The term liquidation may also be used to refer to the selling of poor-performing goods at a price lower than the desired or cost to the business.

Businesses can liquidate their assets for any number of reasons, but the main two reasons are the company is failing and restructuring or investors want to leave the business.

So liquidation is
1. The paying of a debt.

2.The conversion of assets into cash. Just as a company may liquidate an entire subsidiary by selling it , so too may an investor liquidate by selling a particular type of security.

3. The selling of assets &the paying of liabilities in anticipation of going out of business.

Liquidations are far more common in bankruptcies and situations where the business is closing because it can’t support itself with revenues than any other instance. In a bankruptcy, the court generally takes control of the assets in order to sell them at auction to pay off ...

...the outstanding liabilities. In many cases, there aren’t enough assets to pay off creditors, so many of the unsecured lenders are out of luck. They won’t be repaid.

Occasionally, investors of partnerships & corporations want to leave the business or just receive a portion of their investment back. This situation is called a liquidating dividend. When the board declares a dividend to shareholders without enough retained earnings or capital ..

...accounts to pay for the distribution, the company effectively returns some of the shareholders’ original investment. In other words, there isn’t enough cash from operations to pay investors a return on their investments, so some of the business assets are sold in order to..

...give money to the investors.

Whether in a bankruptcy or a liquidating dividend, a liquidation is the same. The assets of a business are being sold and the company is shrinking in size.

KEY TAKEAWAYS
- The term liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants.
- A bankrupt business is no longer in existence once the liquidation process is complete.

- Liquidation can also refer to the process of selling off inventory, usually at steep discounts.

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