Exploring Your Liquidity Options

Exploring Your Liquidity Options

By Kim Levin

April 22, 2010

As a business owner, at some point you will want to extract some, if not all of your wealth from your business. You need to determine not only how to achieve, but maximize liquidity in terms of your personal wealth.

The first step in this process is to become educated; a thorough understanding of your options is essential. The most typical liquidity options for an owner of a middle-market privately held business include:

A sale to a public, international or large private company provides immediate liquidity and advantageous tax structures however it can sacrifice important personal considerations if you are not ready to exit or relinquish control.

A strategically identified investment group can provide premium value and liquidity as well as financial resources to further the company’s growth. However you must be ready to share or relinquish control of the business.


Initial Public Offerings (IPO) are designed to provide capital to promote growth and can generate significant market value. However, it may be some time (years) until you can generate liquidity.

Recapitalizations are often thought of as one of the best liquidity options, but are the least understood by business owners. Properly structured with a private equity group, a recapitalization can provide you with flexibility and a range of personal and financial advantages.

  • Immediate LiquidityA large portion of the sale is paid at closing which enables you to diversify your net worth and if desired, pursue other business or personal goals or lifestyle change.
  • Ownership Retention – By investing part of the proceeds back into the business you still own part of the business and in some cases, majority share. You receive continued ownership benefits and participate in the future profitability.
  • Operating Control – The focus of the investor is on the future of the business and potential return on invested capital. The investor supports management to achieve growth and profitability. You implement growth strategies and remain in control of the day to day management of the business.
  • New Equity Capital – As time goes on, you may not want to take 100% of the financial risk to expand the business. This infusion of new capital allows business growth without the financial pressure.
  • Management Participation – A strong management team is essential in a recap transaction and typically, senior management is offered options to participate in equity.
  • Two Bites of the Apple – You sell some now for cash and some later when the business has achieved a desired level of growth and value, which often exceeds the first transaction value. This strategy is often used to provide liquidity for ownership prior to an IPO.

Under an ESOP you may sell a portion of the Company at fair market value, maintain complete control and achieve personal diversification with tax deferral benefits. ESOPs offer a desirable alternative for liquidity for succession planning to employees, key management and children. An ESOP can finance equipment purchases, plant expansions and acquisitions. The ESOP will provide the capital and tax advantaged repayment of that capital. The tax code allows a company to repay both principle and interest on an ESOP loan using pre-tax dollars. You will maintain complete confidentiality with regard to P&L statements, compensation plans and other key business issues. The only information employees receive is an annual statement as to the value of the Company’s stock and their vesting schedule.

Achieving liquidity is likely to be the largest financial transaction of your life, and may occur only once. A successful liquidity strategy is a process not an event and must be done correctly every step of the way if financial rewards are to be maximized. Knowing your liquidity options is the first step.

posted by Susan Jones