Liquidity is the process of converting an investment position and exchanging it for cash. The purpose of liquidating a company is to transfer its non-liquid assets into liquid assets such as cash, stocks and bonds. This process is an exit strategy utilized by private firms and requires careful planning before it is used. Investors and founders of a company are the primary parties involved in this process.
Understanding Financial Liquidity
Cash stands is the most liquid asset that a company can own. However, a firm can convert the money into stocks and bonds since they are easy to convert back to cash. Compared with other assets such as collectibles and stamps, money stands to be the easiest to trade with. For instance, real estate, buildings and lands take more time to sell hence considered as the least liquid assets.
Reasons Why A company Would Opt To liquidate
Several reasons can trigger a possible liquidity event. For instance, when a firm reaches a particular target, it might decide to pay off its investor and close down. Other situations that can trigger such a decision are legal reasons, change in market conditions and the need to prevent a loss.
Situations That Can Lead To A Delay In Achieving Private Company Liquidity
Modern companies are increasingly finding different ways to exit other than opting for liquidation. For instance, companies have access to more private funding over recent years, providing enough capital for growth.
There is also low operation pressure since the costs of starting up a company have drastically fallen over time. So, companies can easily reach profitability without the burden of using public funding.
Finally, there are other attractive exit plans that firms can adopt. There has been a significant downfall in IPOs, bringing the need of having an alternative exit plan.
Alternatives That Can Be Used To Achieve Private Company Liquidity
Firms are continually seeking options for their exit plans to alleviate their financial pressure. One strategy that they can implement is to build pressure on investors to put more investments in the company. Initial investors whose funding might be quickly winding down should be shown the merits of staying within the firm.
What Is Interim liquidity?
Interim liquidity explains a situation where investors and founders agree on partial liquidation when they start losing confidence in the decision of how many assets need settlement. Companies can also reach this decision when there is a need to consider co-sale, first refusal and stakeholder rights. There are two ways to achieve interim liquidity.
• Direct sale: In this case, an investor purchase shares directly from the shareholders. This approach can be a disadvantage when the investor wants to negotiate the rights associated with the securities. Besides that, shares that are not from the issuer are non-qualifying, subjecting the investor into restriction when one wants to be an investment adviser.
• Two-step approach: in this process, the investor invests more than the exceeding needs and use the extra amount to purchase stock held by existing stockholders. The shares purchased by the investors come along with the benefits and right of their previous holders, reducing the possibility of hurdles.