What does the term 'liquidation' refer to in a business context?

In a business context, 'liquidation' refers to the process of closing a business and selling its assets to pay off creditors. This occurs when a company is unable to meet its financial obligations and needs to settle its debts. During liquidation, the company's assets—such as inventory, equipment, and property—are sold off, and the proceeds are used to pay any outstanding liabilities. If any assets remain after all debts have been settled, they may be distributed to the company's shareholders.

This definition highlights the significant and usually final nature of liquidation, emphasizing that it is often a response to financial distress. The process involves careful appraisal of assets and may take place under the supervision of a legal or financial entity, especially in the case of bankruptcy proceedings. Understanding this process is crucial as it impacts creditors, employees, and the market as a whole, marking a definitive end to business operations.