What Does Liquidate Mean?
Liquidate means to convert assets into cash or cash equivalents by selling them on the open market. Liquidate is also a term used in bankruptcy procedures in which an entity chooses or is forced by a legal judgment or contract to turn assets into a "liquid" form (cash). In finance, an asset is an item that has value.
In the investments arena, liquidation occurs when an investor decides to close out his or her position on a particular asset or security. An investor that is long a stock may decide to sell some or all of the shares held in his portfolio for cash. Liquidating an asset is carried out when an investor or portfolio manager needs the cash to re-allocate funds or re-balance the portfolio. An asset that is not performing well in the markets may also be partially or fully liquidated to minimize or avoid losses. An investor who needs cash to fulfill other non-investment obligations, such as bill payments, vacation expenses, car purchase, tuition fees, etc. may opt to liquidate his assets.
Financial advisors tasked with allocating assets to a portfolio usually consider, among other factors, why the investor wants to invest a certain amount of money and for how long s/he would like to invest for. A portfolio comprised of stocks and bonds for an investor whose objective is to purchase a home five years from now, may have these securities liquidated in five years. The cash proceeds would then be used to make a down payment for a home.
An individual may also decide to liquidate assets, such as house and land for cash. The cash could then be used to boost his or retirement nest egg or pay off creditors.
While businesses can liquidate assets to free up cash even in the absence of financial hardship, asset liquidation in the business world is mostly done as part of a bankruptcy procedure. When a company fails to repay its creditors due to financial hardship and prolonged losses in its operations, a bankruptcy court may order a compulsory liquidation of the business assets if the company is found to be insolvent. The secured creditors would take over the assets that were pledged as collateral before the loan was approved. The unsecured creditors would be paid off with the cash from liquidation, and if any funds are left after settling all creditors, the shareholders will be paid according to the proportion of shares each holds with the insolvent company.
As said earlier, not all liquidation is as a result of insolvency. A company may also undergo a voluntary liquidation, which occurs when shareholders of the company elect to wind down the company. The petition for voluntary liquidation is filed by shareholders when it is believed that the company has achieved its goals and purpose. The shareholders appoint a liquidator who dissolves the company by collecting the assets of the solvent company, liquidating the assets, and distributing the proceeds to employees who are owed wages and to creditors in order of priority. Any cash that remains is then distributed to preferred shareholders, if any, before common shareholders get a cut.