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Business liquidation options vs. an owner's retirement

Kelly Kowalski, Cliff Noreen, and Bronwyn Shinnick

Posted on February 08, 2023

Our executives and experts team up to write educational articles, covering a variety of financial topics such as life planning, college savings, and retirement.
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Define the two basic types of business liquidation and their differences.

List what moves are likely to be better options to business liquidation and why.

Provide a business value questionnaire to gain insight as to whether it's likely you'll need to liquidate your business when you're ready to retire.

If you are a business owner looking to retire, you may face some challenges.

Instead of selling or transferring the enterprise, you may be forced to liquidate your business. Indeed, only 25 percent of new businesses make it to 15 years or more, according to the Bureau of Labor Statistics. And liquidation often means getting less than 100 percent of a business’s value, experts have observed. And, since many business owners have a substantial amount of their net worth intertwined with their business, that can have negative implications for their retirement.

So, what do you do? First understand that there are two basic types of liquidation.

  • First is an ordinary liquidation, where a business is shut down and its assets sold off in an orderly manner.
  • Then there is forced liquidation, which is the process of rapidly selling off all assets to anyone that will immediately purchase them (you’ve heard the term “fire sale,” right?).

Neither ordinary liquidation nor forced liquidation is the optimal way to sell a business as neither route is likely to obtain the full value of the business for its owners. But the return from a forced liquidation is much worse.

In an orderly liquidation the owners may collect most of the accounts receivable they are owed and some value for assets.

But in a forced liquidation, the business owner(s) can often only receive 50 percent of their accounts receivable and perhaps only 30 percent of the value they place on other assets.

What are possibly better options to business liquidation?

  1. You can sell to an outside buyer. Quite often you get the most dollars at the point of sale but you are also sharing your trade secrets with the competition.
  2. You can sell to management. You know who will be getting the business but typically this results in an installment sale. And if the folks that buy are better employees than entrepreneurs this could be a problem.
  3. Sell to a private equity group. This can bring significant capital to the owners and allow you to stay involved. But just because you’re involved does not mean you’re the boss. The PE folks will be calling the shots.
  4. You can form an Employee Stock Ownership Plan. This could have some great tax advantages but does have extra expenses and a layer of complexity.
  5. You can gift your firm. This ensures that you have family legacy but as a gift you may be leaving a lot of money on the table.

Hopefully, as a small business owner, you can avail yourself of the options above and never need to go through either ordinary or forced liquidation.

Nevertheless, as noted earlier, 40 percent of all business ventures end in some sort of liquidation, so the odds that you will end up going that route are significant. And as a result, the odds that you likely won’t get the full value of your business become higher.

Why is the value of your business so important? Experts suggest that 65-80 percent of an owner’s net worth can be tied up in their business.3 If they are planning on using the proceeds from the sale of the business to retire on, receiving less than 100 percent could create problems.

Heading toward liquidation?

How can you tell if your business is heading toward a liquidation process? By asking questions that relate to your business’ value if you die or become disabled, you can gain insight as to whether it's likely you'll need to liquidate it when you're ready to retire.

What kind of questions? The following hypothetical queries were gleaned from the MassMutual Business Value Diagnostic Tool. If you answer “yes” to four or more, it may be an indication that, in your absence, your enterprise has a higher probability of going into forced liquidation.

If the owner died or became disabled... (Check off a response to each question)

1. Would spouse own and/or control owner’s stock?



2. Would spouse be liable for the company’s debt?



3. Does spouse lack executive experience?



4. Would sales likely suffer in the short run?



5. Would profits likely decline?



6. Would key employees think about leaving?



7. Would clients think about leaving?



If you score less than four, congratulations! If you score four or higher here are some things you can do…

Build a solid management team. This one is very important and relates to many of the seven questions above. If your business is overly reliant on you it could be difficult to sell and if sold you may not get top dollar. Think about it, which would you rather buy, a company where you have to make all the decisions and create all the good ideas or a company where others contribute and can pick up the slack when you are not on your “A” game. Of course, like most people you want a high performing team of employees that bring good ideas and solutions.

Delegate responsibilities to your key employees. As noted above, once you build your high performing management team, make sure you delegate to them. Yes it can be hard to give up some of the control but if you can create a company that runs without you, ironically, it could be more valuable when sold.

Implement key employee retention strategies. So you have built the team and you delegate to them. Now you need to make sure they do not leave. The MassMutual Business Owner Perspectives Study concluded that keeping key employees loyal is a major concern of business owners. Also, financial professionals often have good advice on retention strategies, yet about two thirds of owners take a do-it-yourself approach, according to the study.

Benchmark your benefits package. Is it enough to keep your employees with you? OK, so you have executed on the three suggestions above, and have created a management team, delegated to them and have implemented win-win retention packages. Now make sure everyone else at the company is taken care of too. This is something that you can delegate to an experienced financial professional. If you offer a retirement plan or health insurance, do you know how your offering stacks up against the industry average? Are you offering too much or not enough? These are things that a thorough review can show you.

If you have a partner, create and understand your buy/sell document. This is critically important. Internal MassMutual research conducted in 2022 shows that 54 percent of buy/sell agreements are not properly funded and nearly half of them are stale. Maybe this matters and maybe it doesn't, but here are the two questions you need to ask yourself:

  • First, do you know what your firm is worth?
  • Second, if your partner dies are you financially able to cover what your buy/sell document could require you to pay? Likewise, if you die, are you confident that your partner has the financial resources to take care of your family? This may be where you need to consider life insurance. After all, insurance is all about laying off risk that you do not want to assume.

If almost half of all privately owned business end up in one form of liquidation, what are the chances that your firm ends like this? There are no sure-fire ways to tell but there are some questions you can answer that can give you a heads up. And like everything else that has financial ramifications, if you anticipate and plan you can mitigate the risk.

Discover more from MassMutual…

Ways to sell or transfer a business

Knowing the value of your business

Contact a financial professional

This article was originally published in September 2016. It has been updated.


The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.