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How Should Owners Cash Out Of Their Business ?
These three exit strategies for entrepreneurs selling their firms present unique advantages and challenges .
By Andrew Apfelberg
THOSE WHO HAVE RUN SUCCESSFUL companies for a number of years , either as CEOs or founders , will inevitably face the question : When and how do they bow out ? They might have personal aspirations to do something else , or they might think that the market conditions have made it the right time for them to leave or at least sell most of their interest in the company . Maybe they want to monetize their life ’ s work but keep running the company . Maybe it ’ s a CEO who ’ s been running the company alongside its founder and wants to do something else . They might want to unlock value for their company ’ s stakeholders by selling their shares or recapitalizing the company — or helping it go public .
But for a smooth transition , they ’ ll need to understand the various exit options .
This article delves into three of the most common methods for entrepreneurs ready to sell out : dividend recapitalization , private equity investment , and the sale of their company . ( Sometimes , CEOs or founders will turn a company over to their employees through employee stock ownership plans , or ESOPs , though that ’ s less common .)
The right path depends on various factors , but by engaging the right legal advisor , your client can navigate the complexities and implement the plan effectively .
Dividend Recapitalization : Balancing Liquidity And Control
Dividend recapitalization involves the company taking out a term loan and using the proceeds to issue a special dividend to shareholders . If the CEO is not the founder of the company , this strategy allows him or her to unload shares while letting other shareholders , perhaps the company ’ s founders , retain complete ownership while accessing liquidity . There are pros and cons to this approach . Among the pros is ownership retention . The founders of the company ( if the CEO is not among them ) can maintain 100 % of the equity in the company , preserving voting rights and future upside potential .
This method also allows the owners of the company to keep control , since no power is transferred to external investors . The founders are bound only by typical loan covenants .
Dividend capitalization also offers the company some liquidity , giving it immediate cash and enabling the CEO who ’ s leaving to diversify their personal finances without losing their shares in the company , which they might want to hold onto after they leave .
In low-interest-rate environments , shareholders can invest the dividend , yielding returns that surpass the loan ’ s interest rate . Additionally , the debt can be refinanced to extend repayment terms .
But the dividend capitalization strategy has disadvantages , too : One is that it offers less liquidity than an outright sale of shares
30 | FINANCIAL ADVISOR MAGAZINE | OCTOBER 2024 WWW . FA-MAG . COM