GOB or Store Closing Sales in Bankruptcy- Part I

Retail bankruptcies almost always include going-out-of-business (GOB) or store closing sales. They are crucial to the successful reorganization of a distressed retailer as they impact the interests of vendors, landlords, general unsecured creditors, secured lenders, and the debtors’ employees, competitors and customers. In Part I of this blog, we will discuss the decision whether to use outside liquidators to assist with the GOB sales and the need to obtain bankruptcy court approval before the sale can begin.

The retailer’s first step is to figure out which stores to close. In order to make this decision, the retailer should generate a store-by-store profitability analysis, also called a “4-wall analysis,” that considers both quantitative (cash contribution) and if possible, qualitative factors such as market size and position, physical location of the store and competitive advantages.

Retailers must also decide whether to conduct the GOB sales using in-house resources or to seek the assistance of a liquidation company. Doing it in-house can be better if there are only a handful of stores being closed and could potentially lead to higher proceeds since nothing has to be shared with liquidators. Conversely, if there a large number of store closings anticipated, a liquidation company can provide the resources and knowhow that may yield a higher net recovery. If the retailer decides to use a liquidation company, competitive bids are often solicited from multiple liquidators. The retailer evaluates the bids and selects the highest and best offer to be put forth as the stalking horse bidder. The retailer will then seek bankruptcy court approval of the terms and conditions of the stalking horse bid, and generally the court will entertain other bids through an auction process.

The retailer’s agreement with the liquidator typically includes a listing of the stores included in the GOB sale and liquidator fees and expenses. In some cases, the liquidation company will guarantee a floor price and in other cases, the liquidation will be on a purely commission basis. The agreement generally also includes:
  • The sales and supervisory personnel to be provided by the liquidator,
  • A liquidation budget showing responsibility for sale expenses,
  • How the merchandise will be valued (e.g. typically the lowest ticketed price), and
  • Timeline and allocation of duties between the retailer and the liquidation company.
The retailer also needs to inform employees and make arrangements to retain those needed to assist in the GOB sales. In many cases, retailers extend incentive bonuses to retain managers and key employees for the duration of the GOB sales.

In the second part of this blog, we will discuss “obstacles” set forth by vendors and landlords as well as discuss certain issues that the retailer may have to face in conducting the GOB sales.