Which Approach Is Right for You?
Many business owners know how challenging it can be to balance the capital requirements of their company with their personal wealth objectives. Unfortunately, they are not always aware of what liquidity alternatives are right for them. If you are a business owner, these options can help provide the capital you need to manage your business and cash to make distributions to support your lifestyle.
Depending on your company’s profitability and your personal financial aspirations, an approach can be crafted that goes a long way to overcoming these serious challenges to building and maintaining a business legacy. Our experts are ready to help you decide which approach is best for their situation.
Below are three types of liquidity alternatives business owners might consider.
Selling Equity to Generate Liquidity
Selling equity is often a last resort for family business owners, but situations can develop where it must be considered. The reasons vary, but they may include operational difficulties, seizing a substantial strategic opportunity, or the need for wealth diversification and retirement planning. Two of the most significant issues involve selecting the buyer and determining whether to sell control.
- Sale of a Minority Interest to a Capital Partner
- Sale Of Control
- Structured Sale to an Employee Stock Ownership Plan (ESOP)
- Initial Public Offering (IPO)
Leveraging the Balance Sheet For Liquidity
Borrowing funds from a bank or raising debt capital in the private markets are liquidity alternatives that involve greater risk as the balance sheet is leveraged. Although modern corporate finance theory asserts that a prudent amount of debt in a company’s capital structure enhances the value of the business, many business owners prefer a debt-free balance sheet due primarily to their low tolerance for risk. Accepting a reasonable degree of leverage, however, can often help fund the growth of the business and distributions for shareholders.
- Dividend Recapitalization
- Borrowing to Fund Share Purchases
Using Cash Flow For Liquidity
One conservative approach to sourcing liquidity is to focus on the cash flow generated from the company’s operations. Ideally, as the company achieves profitability and increases its scale of operations, a degree of stability is achieved. At this stage, growth can be financed with cash flow and the business owner can consider several low-risk liquidity alternatives:
- Share Redemption Programs
- Share Buybacks
- Special Dividends
