The Definitive Guide to Business with Marcus Lemonis

Marcus Lemonis: How liquidation can actually help a struggling business

Struggling businesses that find themselves with unwanted inventory and a need for cash have at least one thing to try that isn't quite as painful as it sounds, according to entrepreneur Marcus Lemonis.

Despite the fact that it can reduce revenue in the short term, liquidating products at a steep discount can actually help companies rebound — provided they pay attention.

"Any time you're gonna put on a liquidation sale, you have to have a purpose behind it," he said. But contrary to popular opinion, that purpose isn't just to generate cash, as the host of CNBC's "The Profit" revealed on the latest episode in which he helped New York–based Bowery Kitchen Supplies address drooping profits.

Marcus Lemonis explains to the owners of Bowery Kitchen Supplies that stale products have to be liquidated.
CNBC
Marcus Lemonis explains to the owners of Bowery Kitchen Supplies that stale products have to be liquidated.

"I want to see what products sell and don't sell," Lemonis said. "I want to watch how the customer navigates through the store. I want to watch how the staff integrates with customers."

Over the years, owners Howard Nourieli and Robyn Coval had amassed a swath of inventory that had piled up, making it difficult for customers to find what they were looking for. Bowery Kitchen Supplies' sole store, housed inside New York's heavily populated Chelsea Market, was generating $3 million in revenue, but it posted a $100,000 loss in 2015. Still, the company was an attractive enough candidate for a $350,000 investment from Lemonis, who saw an opportunity to turn things around.

"If I am going to renovate the store, I don't want to spend $50,000 hiring movers to pack it all up. I'd rather generate the cash and solve all those other problems and get questions answered," Lemonis said.

Bowery Kitchen Supplies was suffering from a scattered, crowded store.
CNBC
Bowery Kitchen Supplies was suffering from a scattered, crowded store.

One of the most important questions the liquidation answered was which products were making the company the most money — and which products weren't.

"So you see the point? Inventory management is what kills people. Even at a dollar, people don't want [some products]," Lemonis said. "I'd rather have the cash in my hand so I can reinvest it into inventory that actually sells."

Quickly, the company was able to take the cash it generated from the discounted products, over $300,000, and rearrange its store to improve the customer experience and showcase products that were proven profit generators — a small price to pay for a long-term gain.

Video by CNBC's Andrea Kramar

CNBC's "The Profit" airs Tuesdays at 10 p.m. EDT.