I'm not really sure the first time I heard that phrase or whether I really ever understood its true meaning. Some time ago, we were retained by one of our clients to investigate events surrounding a recent liquidation of some of their under-performing assets. Basically, we were engaged to assist them in facilitating the efficient closing and disposal of a number of their properties.
To the client, these assets represented a dark spot on an otherwise bright P&L. To them, efficiency and speed were important in completing the task. Unfortunately, speed became the enemy of control and some key priorities were missed.
The client thought they had selected the perfect vendor specializing in liquidation, but, in their haste, they unfortunately sidestepped some important points in the process.
Even in highly specialized liquidations, competition of a well-defined and transparent Request for Proposal (RFP) can be an essential tool to prevent mistakes from being made, or worse. In this case, the client did not take the time to put together an RFP or conduct basic due diligence and made some poor decisions balancing time against efficiencies. They relied heavily on a certain employee who, as it turned out, had an undisclosed interest in the sole source awardee.
Understanding the Value of the Assets Being Liquidated
Although assets are typically depreciated on the owner's books over their expected useful lives, they also have a fair market value which the owner should try to ascertain prior to liquidation, independent of the firm hired to conduct the liquidation. With the current open source information on commercial items, such work done on a spot check basis is often not that hard to accomplish. In our case, we learned that the value of commercial items was easily identified and could have been objectively determined to give the company some idea of what a fair selling price should have been. As on old adage, people rarely do what is expected but often do what is "inspected" – or, rather, it's better to trust and verify than just to trust alone. A few careful steps during this execution phase would have revealed some obvious red flags during the process.
Right to Audit
In business transactions between commercial entities, strong language giving you the right to audit is a way to keep transparency and relationships strong. It is especially important in liquidation relationships that the person seeking to liquidate assets have the right to audit the liquidator's processes, not only from a controls standpoint, but also from a liability standpoint. These clauses should be negotiated to last not only during the pendency of the term of the contract, but for a mutually agreeable term after the close of the deal. This allows you to have a "look back" to help judge the profitability and efficiency of the overall exercise. It also helps to determine where the trail ends as to the ownership of the goods that are liquidated. In commercial liquidations, assets are sometimes repurposed and placed into use by other commercial entities. Having a clear record of title not only limits your liability from a products liability standpoint but also assists in determining just how much was actually paid for that asset by the new owner in due course. In this case, we discovered liquidated items that were sold to an entity that turned out to be nothing more than a "shell company." They purchased items from our client at a fraction of their real values only to immediately turn them around and sell them to a real liquidator for 2-3 times the price they paid. Our investigators found items that they could trace from the client to the shell company to the liquidator and then to the new owner. By following those items, we learned the true price and the true loss to the client. Had it not been for a few of these examples, this critical piece of the scheme would not have made it into the case.
At the end of the day, businesses expand and contract and sometimes those activities necessitate dispositions of underperforming assets. By taking some simple steps, you can minimize disruptions without slowing the process and still insure that you maximize return on even the assets that don't perform at their peak. The good news in this matter was that the client not only recovered what they should have received from the liquidation ($3.5MM instead of $130,000), but the fees for the investigation were completely covered as well through the client's insurance coverage.
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