Prepare Now for the Future Sale of Your Amarillo Business
Status Quo (the “either”). The status quo may be an excellent strategy. If sales and earnings are rising, Amarillo business owners can benefit from the growth and expected appreciation in value and maintain control of the business. However, the status quo, in many instances, does not provide liquidity and diversification opportunities for Amarillo owners and places all execution risk on them. A decision to maintain the status quo for your business may not do much to advance necessary ownership and management transitions, as well. A decision to maintain the status quo should be based on conscious decision making and not on procrastination. And the status quo has an insidious side to it – unless you and the other owners do something, you will stay in the status quo for a long, long time; therefore, you have to question the status quo on an ongoing basis. As a local Amarillo business consulting firm, Caprock Business Consulting can help you answer these questions.
Ultimate Third-Party Sale (the “or”). If your business is continuing in a status quo mode, chances are you are not preparing it for an eventual sale and are not working with an Amarillo business consulting firm. Chances are also that you and the other Amarillo business owners may not be preparing yourselves for an eventual sale. And if you are maintaining a status quo status, you may not be able to influence the timing of an eventual sale. The ideal time to sell a business is when the markets are hot, when financing is readily available when your business is tracking upward and has a good outlook, and when the owners are ready. In reality, what you can hope to achieve in the sale of your business is the best pricing available in the market at the time of the sale. If you remain in the status quo, you may not get to choose the timing of the eventual sale. If it seems like we are painting an eventual third-party sale as an unfavorable outcome, we are not. It can result in an unfavorable outcome, however, if your business is not ready for sale at the given time and if you and your other owners are not ready, personally, for that eventual sale.
What to Do in the Interim Time
As an Amarillo business consultant, we help business owners manage illiquid, private wealth in businesses, which requires far more effort than the owners just running the businesses themselves. We all have to manage our businesses. Managing the wealth in our Amarillo businesses requires a much more active role for business owners and often a different level of attention on the business itself. The status quo and eventual third-part sale are, indeed, bookends. Consider the table below:
Amarillo business consultants are focused on creating liquidity opportunities over time and on achieving reasonable returns from Amarillo companies on a risk-adjusted basis. Amarillo business consultants use the companies as vehicles to generate liquid wealth and diversification opportunities over time.
The table above shows the bookends of status quo and third-party sale options. In between are a number of options that owners of successful private companies can use to manage the wealth tied up in them and to create ongoing opportunities for liquidity and diversification. At the far right, after the sale of a business, its owners must, in many cases, be prepared for the rest of their lives. So it is important to run a business in such a way that its owners develop liquidity and diversification to create options for the rest of their lives.
As an Amarillo business consultant, we understand the table is not all inclusive. It does, however, include some easily implementable options like establishing a dividend/distribution policy or making occasional share repurchases as owners need some liquidity or, for example, when an owner leaves the company. This purchase might be pursuant to the terms of a buy-sell agreement.
If your Amarillo company has significant excess assets, it is probably a good idea to clean up your balance sheet and declare a special dividend. It may also be appropriate to have one or more key managers acquire small stakes in the company to facilitate alignment and future management transitions.
The next category of options in the table above are termed “significant and realistic minority options.” They include relatively small leveraged dividend recapitalizations or share repurchases. The options also might include the creation of a 30% or less ESOP in appropriate circumstances. These transactions certainly won’t happen without someone doing something. They will likely require the assistance of outside expertise, and there will be certain transaction costs. Transaction costs should be considered in the context of investments.
The third category after the status quo is called “control level options.” For some successful Amarillo companies, it may be appropriate to engage in substantial transactions to create liquidity opportunities and to retain ownership in expected future growth and appreciation. Options here include:
- Leveraged share repurchases
- Leveraged dividend recapitalizations
- Employee Stock Ownership Plans
The final category is the bookend of third-party sale transactions. It should now be clear that there are options other than selling a business today, or simply maintaining the status quo, for managing the illiquid wealth in your private company.
Benefits of Focusing on Interim Time
The shareholder benefits of employing one or more of the above strategies over time include the following:
- Acceleration of cash returns, liquidity opportunities, and opportunities for diversification and creating liquidity independent of your company
- Ability for your owners to diversify their portfolios
- Optimization of your company’s capital structure with reasonable leverage
- Enhanced return on equity with reasonable leverage
- Enhanced earnings per share for some options
- Planned changes in ownership structure with shareholder redemptions, with remaining owners achieving pickups in their relative ownership of the company
- Enhanced performance and reduced business risk with focus on the business
Employing one or more of the above The One Percent Solution strategies is tantamount to using modern investment theory concepts and basic corporate finance tools in the management of illiquid private company wealth.
For more information or to discuss business consulting and transaction issues in confidence, please do not hesitate to contact us.