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Choosing a Liquidator and Negotiating the Fees

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This article is designed to assist anyone selecting a liquidator and negotiating the fee structure for payment of those services. It is not meant to be comprehensive, but to provide an overview of the processes. With the ongoing shakeout in retail, we tend to think of liquidators as sellers of inventory. However, the term "liquidator" covers a broad range of services and disciplines; it may include major aspects of valuation, but the primary service is always one of converting assets to money. This can be accomplished through activities ranging from business brokerage to raising funds from surplus assets, from consulting on business practices to the sale of the entity either piecemeal or in whole for its closure. The role of a liquidator can be exceptionally complex and costly; it is important to select the proper type of liquidator with the appropriate experience and integrity to perform the task.

The Selection Process

The business seller should consider the selection of an experienced liquidator with the requisite expertise for utilizing many possible liquidation and sale strategies and techniques. The liquidator should have a good understanding of the business within its industry and all operations specific to it, its future potential and the industry domestically and throughout the regional market area. The liquidator candidate should also be familiar with local and country laws and/or restrictions for tax consequences, labor and licensing. Finally, the liquidator should have sound judgment regarding the potential for acceptance of improvement through operating changes.

A good liquidator has the experience and knowledge to identify potential buyers who may purchase the business as a going concern. Because purchasers might consider privatizations, mergers, brokerages or creative financing, the well-versed liquidator's measurement skills and contact network can be invaluable. The liquidation professional chosen for extensive asset conversions to cash should be adept at determining the possibility of piecemeal or group sales into various profit centers (for division sales, for instance), recognition and sales of assets that are surplus to the operational requirements, potential markets for individual assets, and adaptability of assets for diversification into other markets.

The seller should be able to obtain good estimates from the liquidator for costs associated with marshaling (finding and bringing assets together), merchandising (preparing for proper exposure to the market) and marketing. The marketing phase will involve costs associated with preparation and printing of brochures and ads for publications, ad placements and timing, and announcements via radio and television. Other cost projections will include the fees of the personnel needed to accomplish the sale, e.g., merchandisers, marketers, advertising specialists, auctioneers, security experts and clerical and part-time hires for specific tasks such as drivers, clean-up, etc. In some cases, other cost estimates may pertain to lawyers, financial experts and industry specialists.

Major considerations involving the methods of sale for a liquidation should include: the timing; whether to utilize an auction and/or orderly liquidation; the advertising economics and media balance (cost for that which is required to accomplish the sale—no more/no less); use of security and monitoring of assets; meeting insurance and/or bond requirements; use of personnel and their assignments; and the possibility of partnering with others, such as local brokers or dealers for certain types of equipment, to gain greater exposure.

A good liquidator with an extensive network, database and market exposure brings to the seller the crucial, value-added factors that are important to a sale's success. Such a liquidator will be able to demonstrate a history of successful results. Other important attributes of such an expert will be the appropriate staff to meet the challenge of all that is required, experience within the scope of the project, diversification and creativity to meet the unique characteristics of the situation, a solid reputation among buyers and sellers, and proven procedures that have delivered top-net recovery funds to sellers/clients.

The selected liquidation professional should have sufficient experience to understand how value may be affected by location, requirements to move assets or sale site, sale method acceptable to the region, and locational expense adjustments. When dealing with a situation outside of the liquidator's country, language proficiency and cross-border markets expertise are essential. The seller should view the liquidator's sales history as a measurement guideline for selection, while keeping in mind that it is the seller's responsibility to bring to the process the necessary capability for proper interpretation of such information.

All of the factors outlined here should form a part of the selection criteria for a liquidator. Other important factors to be considered in this process are whether the fees are fair and reasonable for the size, risk and required effort, the liquidator's reputation/references, the liquidating company's stability, and the seller's level of confidence in the integrity of the liquidator to recommend the highest net recovery method for the client, rather than for the liquidator.

Last and certainly not least, the seller must consider the highest potential return (not necessarily consistent with the lowest fee and expense cost to the seller) and the realistic probability of result—not just a promotional statement of the possibility of a wonderful result. Naturally, the seller's goal is to obtain a highly effective, professional liquidator for the assets in question. The professionalism of the liquidator may be demonstrated by the proposal presentation (the content of which the seller should be fully aware), the presence of the liquidator and its management through the interview process, the organization of the liquidator's office, the number and location of the offices, and the number of personnel.

Other professional qualification concerns may involve the diversification of expertise (type of specialists and number available to work on a project), and the record of accomplishments of other activities that may be important as an alternative consideration (e.g., real estate brokerage, management consulting, loss assessment, financial consulting and so forth).

Finally, international-oriented considerations in the selection process may relate to the willingness of the liquidator to consider the establishment of a presence in the local area of the project on a semi-permanent or permanent basis. Such a strategy would be advantageous in order to react to changing situations in an efficient manner and to better understand the area of the subject. The willingness of the liquidator to develop and/or use local personnel in an international sale of assets helps to avoid language barrier problems, may be more culturally acceptable and just plain good politics, and sometimes can be more cost efficient. Obviously, consideration of a long-term commitment by the seller in favor of the liquidator would be required to amortize the liquidator's investment for establishing operations in a local area with return of and on the required time, effort and money.

Fee Structure

There are many ways that fees are paid to liquidators. In some cases, there are local rules or acceptable procedures that may be restrictive. In some countries, there may be concern about conflicts of interest. Also, in some countries it may be unacceptable for the liquidator to assume the roles of both valuer and liquidator. Often this restriction works to the detriment of the possible recovery for the following reasons:

1) The valuer may have insight through the research phase of an appraisal that will assist in the marketing. It is possible that the appraisal could be based on a planned liquidation scenario understood by the appraiser. The form of compensation of an appraisal, if required, is usually a quoted fee by contract price or daily rate that may or may not include expenses.

2) Who better to value under liquidation scenarios than one who also is required to perform? Many bad appraisals, as stated by numerous banks, have been performed by appraisers who are familiar with good theory but who do not make any adjustments for the practical practice of selling under a specific set of circumstances. This adjustment is understood by asset sellers and is referred to as "cause and effect."

3) The experienced liquidator also can be retained as a consultant to determine the best way to solve the particular problem under consideration or whether a liquidation is even necessary or possible. Consultant fees are usually based upon an hourly or daily rate plus expenses that are fair and reasonable.

Many types of fees can be negotiated with or can be offered by liquidators. All of these may be more or less acceptable depending upon circumstances and/or risk.[1] The following explains some liquidation concepts of fees:

1) Contract Price. This is usually not acceptable because there is no incentive to the liquidator. This sometimes can create the suspicion that the liquidator only did a token job to receive the contracted fee.

Example: Agreement to sell for a fee set at $25,000, regardless of the result.

2) Scaled Fee. This is a method where fees are based upon specific levels of recovery. These fees may be scaled up (higher fees for the higher recovery levels) or down (lower fees as recovery reaches lower levels). Both of these scales have advantages that may be associated with the type of assets or circumstances of the company required to be liquidated. Some believe that the rising fees are incentive for the liquidator to strive for higher results, while others believe that the lowering fee scale provides for a weighted fee that is fair (and proportionate to the size of the sale) to the seller.

Example: Scaled up 5% to $1 million; 6% to $2 million; 7% for all above.

Example: Scaled down 10% to $500,000; 7.5% to $1 million ; 5% for all above.

3) Split Fee. This fee concept is often used where the liquidator may have some concern about the level of recovery. There is usually an agreed upon level of recovery above which all monies are split on a percentage basis that may be weighted in favor of the seller, and in some cases, in favor of the liquidator, depending on the perceived risk to the liquidator. In many cases, this split may come after a set amount plus 100 percent of the expense reimbursement (cost of promotion and sale). There are creative alternatives to this such as different splits at different levels including a fee limit or level with no additional fee payments.

Example: $1 million, no fee; the next $125,000 pays for expenses; all above is 40% to the liquidator and 60% to the seller.

4) Guarantees. Some liquidators will offer guarantees for which any lower level recovery will require the liquidator to pay the difference. This procedure has obvious benefits for the seller but also may have detriments if compared to other fee-setting methods of forcing the liquidator to charge a higher fee. The liquidator will expect this greater fee or percentage due to this additional risk associated with the guarantee; this is no different from interest that is charged by banks based upon risk. In addition, the guarantee level or indicator is usually conservative and yet there is a greater fee. This is not always the best fee arrangement unless the seller wishes to pay for this comfort level. In most cases, especially in developing countries, there is too much risk or too high a required guarantee level to economically allow any liquidator to take that type of gamble.

Example: 5% with no guarantee or a guarantee of $2 million for a fee of 7.5% of the gross sale.

5) Purchase to Sell. There are times in which the best method is to sell the assets to the liquidator; the laws of some countries do not allow this if the liquidator is a citizen of the country (e.g., United Kingdom). The public or private resale of the assets by the liquidator provides a fee based upon the difference between the cost plus expenses and the sale(s) to others. There are usually agreements associated with this sale to the liquidator such as free rent or rights to stay for a period of time, utility contracts, security and even use of insurance. In some negotiations the liquidator may allow more payment back to the seller if the sale brings substantially more than could have been anticipated. This is allowed when the liquidator wishes to continue a relationship with the seller and, therefore, would not want the seller to believe that there was an advantage taken in the acquisition.

Example: Purchase for $1 million, cost of sale $200,000, sale expected to bring about $1.6 million to no more than $1.8 million. The agreement is that anything above $1.9 million will be split with the seller as an unexpected recovery; a participating percentage can also be set at differing levels.

6) Straight Fee. The fee arrangement for the best net to the seller is a simple straight-fee commission or flat percentage without guarantees. The seller must depend upon the reputation or confidence in the liquidator.

Example: Sale = $1.5 million, Fee = 5% ($75,000) plus expenses of $32,000 Total cost of sale = $107,000 Net proceeds to seller = $1,393,000.

Expenses can be estimated and made a part of any of the above fee arrangements. They can be included as a part of the fee, but in most cases they are separate from the fee. The seller may elect to pay for all or part of the expenses, or the liquidator may be required to spend its money for all normal expenses of sale. Normal expenses may be advertising, travel of sale personnel, clean-up, merchandising, control or observing of removal. Abnormal expenses may be repairs, utilities, rent, marshaling, loss or future damage, etc. These issues are typically addressed in the contract by any knowledgeable liquidator.

Example: Estimate at $200,000 for expenses as shown in a proposal with an itemization of how the money will be spent that totals to the expense limit. Whether the expenses are part of a fee or not, the seller should still expect to know how the sale will be advertised and prepared.

Conclusion

The process for the selection of the proper liquidator and the negotiations of the fees to be paid are among the most vital decisions that can be made in the economic life or closure of a business entity. The proper choices will result in the greatest return for the debtor, creditors, shareholders and the state if it is a partial owner.


Footnotes

[1] See "Auction Guarantees" by Les Miles, published in The Secured Lender, May/June 1988.[RETURN TO TEXT]

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Monday, September 1, 1997
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