How To Monetize Your Biggest Investment
Part of any investment strategy is figuring out how to turn your investment efforts into cash – the same is true in business. In my experience, business owners get held up when it comes to determining what “success” should look like. As a result, they falter when it comes to figuring out how to monetize the business for their unique succession planning purposes.
Some owners want to bring home top dollar for their company while maximizing their legacy is most important for others. As you can imagine, each option results in different monetary outcomes. Therefore, it’s absolutely critical to start with a clear idea of what your personal succession goals are.
Armed with clear succession plan goals, you’ll gain the clarity and direction needed to help you work toward achieving success in your succession plan strategy while effectively monetizing your business to meet your financial objectives.
Listen to episode 53, “Dispelling The Myths Of Business Valuations,” on Rea’s award-winning podcast, unsuitable on Rea Radio, for more information about succession planning strategies.
5 Ways To Monetize A Business
Once you define your succession goals, you can determine which transition
strategy is best for you. Consider the following options for monetizing your business:
1. Convert your business to an ESOP.
If you feel strongly about continuing your company’s legacy, but transitioning ownership to a family member isn’t an option, an employee stock ownership plan (ESOP) can be a great solution. This option provides you with tremendous tax benefits, helps ensure the continuation of your business and provides employees with a greater interest in the company’s ongoing success. This option allows you to maintain a major role in the company, while affording you the opportunity to sit back and watch as the legacy you’ve worked so hard to build perseveres.
2. Sell to a synergistic buyer.
There are several avenues to take if you decide to sell your business. But you’re likely to obtain a higher price if you sell it to a synergistic buyer – someone typically within your industry, such as a supplier or competitor. A synergistic buyer is often willing to pay more because they are already established in your market. Therefore, may have better buying power. However, selling your business for top dollar could have its drawbacks. For example, when the buyer acquires your business, they may look at redundancies in staff as an opportunity to reduce overhead, which could result in lay-offs for the employees that worked for you. Therefore, this option, while potentially great for you, may take a toll on employee morale and retention.
3. Keep your business intact.
An option for those who are ready to leave the 8-5 routine, but who aren’t quite ready to let go of their business can do just that. All you have to do is transition the company to new leadership and step out of the picture while retaining ownership. This approach, which is actually a pretty common option these days, allows you to continue to receive monetary distributions from the business even though you’re not reporting to work anymore. However, when you do get around to selling the business, under this scenario, once the ink dries and the tax man gets his cut, your portion will likely be less than what you were hoping for.
4. Liquidate and walk away.
Liquidation is easy to implement, but it doesn’t necessarily produce the best return on your investment. When you liquidate, you reduce your business to its component parts and put a value on each of them – and you’ll likely lose the value of your intangible assets in the process. But on the plus side, this is often the fastest and easiest way to get out of business. So if you’re looking for a quick solution, liquidation might be the route to take. However, this option often results in the lowest value for the business and can have a devastating effect on your employees and legacy.
5. Gifting Your Business
Another strategy you might consider is gifting all or part of the interest to family members or employees. While this approach doesn’t necessarily yield money for the seller, gifting is another popular strategy for those who want to continue the legacy of their business. Sometimes the gift includes selling part of the company at a bargain price. If you choose this strategy, ensure you have your retirement fully funded and follow IRS regulations on gifting of stock.
Pick Your Path
As you decide how to best monetize your business, be sure that you fully understand the options in front of you. From there, take steps to position your business for success and develop a strategy that will help you secure your desired outcome. Improve your cash flow, reduce business risks and watch your value go up exponentially.
By Paul Weisinger, CPA/ABV, CVA, CEPA (Cleveland office)