Getting To The Equity In Your Business

siness owners today are confronted with assessingworld markets. As an owner, you need to know that
the value of what they have or, more appropriately,options other than selling the business are available but
may have left in their privately-held businesses.may require some creativity on your part. The key is
Consequently, most business owners are looking atto understand what somebody else would be willing to
their business to determine the value and how it canpay and identify that person. From there, we can go
be extracted. This is a part of the exit planningand take a look at how that other person would value
process.what you have and how you would receive those
There are two very different aspects to getting the‘equity’ payments.
money out of your business. On the first hand, there isSo, in Bill’s example above, he needs to achieve
the income that you draw from the business in termsa net amount of $6,000,000 for the equity in his
of salary, personal/business expenses, and bonusesbusiness in order to achieve his exit goals. If Bill were
that you pay to yourself and/or retirement planto sell the business, he would need to get an asking
savings. All of this constitutes money that's coming toprice in excess of $6,000,000 because taxes (both
you from the cash flow of the business going towardsfederal and state) are going to be owed, and advisory
the lifestyle that you have built for yourself. Thefees are going to be a part of the difference between
second and much more important aspect, particularly inwhat Bill ‘gets’ for his business sale and what
light of the recent economic condition, is getting to thehe keeps. Like many owners, Bill is challenged by
equity — the illiquid part - of your business.today’s lack of buyers and lower values.
As a part of the exit planning process, an owner willTherefore, he wants to look at alternative ways of
want to know their Value Gap — i.e. how muchgetting to the equity in his business.
money they need to extract from the business inBill may look at the option of selling a portion of the
order to maintain their lifestyle without the business.equity in his business to an Employee Stock
The chart below helps to illustrate this point. We seeOwnership Plan (ESOP). By selling a piece of the
that Bill Brown has $1,000,000 saved for retirement butequity today, Bill can bolster his current savings (i.e.
needs a little more than $7,000,000 to maintain hisincrease his financial readiness) while continuing to own
lifestyle. Bill’s Value Gap is $6,000,000. Thea majority of the stock in his company. Although Bill will
question becomes, ‘How can Bill get to the equity inlikely get a lower value for the shares sold today, he
his business in order to close this Value Gap?’can begin to diversify himself away from the business
Like most business owners, Bill is focused on runningand, potentially, receive important tax benefits that go
and growing his business (and surviving the currentalong with the ESOP sale. This is a controllable way of
economic conditions). Bill has some money saved forgetting to the equity in your business.
retirement. However, as we can see, it is nearlyBill may also look to his management team to assist
impossible for Bill to extract enough ‘income’him in extracting the equity from his business.
from his business to meet his exit goals — BillBill’s management team has the potential to
needs to get to the equity in his business.continue to run the business in Bill’s absence.
{2009 Savings: $1,000,000} > {Value Gap: $6,027,783}However, Bill has not started the conversation with
>{2013 Asset Base Required: $7,027,783}these managers as to his future expectation that they
Essentially, the equity that's in your business iswill be so empowered. This is a delicate conversation
representative of more than the accumulated earnings.to have with the managers because the future is too
It is representative of the value that somebody elsedifficult to envision today. What this means is that Bill
would pay for it, so the question becomes, ‘Howmay decide to sell the company in four (4) years
can you plan to tap into that equity over a long enoughwhen the next exit window opens for him. So, he does
time period to draw it out to meet your personalnot want to over promise his managers a future
goals?’ownership stake that he cannot deliver. Bill should
The first step is to realize that there are many waysrecognize that there are ‘higher level’
to get to the equity in your business. You can find aconversations that he can be having with his
buyer, groom a successor, or even create a buyer formanagers today which would make the company
the shares of your company’s stock. The moststronger, while also positioning those managers as
important part of this planning process is thepotential successors to the business. When measured
recognition of the need to plan for your exit and toagainst what Bill needs to extract from his business, it
measure the amount of equity that you will need tomay turn out that having his managers pay him out
extract from your business.over time is his best option and he can build a stronger
In today's environment, the equity can be managed incompany in the meantime.
many different ways. What's important, first of all, isIn conclusion, whether you're looking to your managers
that you set a plan and an expectation as to how youto help you pull the equity out of your business, or
can access that equity. The natural inclination is for ayou're looking to sell to an ESOP, or you are biding
business owner to want to sell - to pull the equity outyour time, waiting for an outside buyer to arrive, it is
all at once. Today’s marketplace has fewerimportant to have a concept of equity beyond just the
buyers than previous years, due mostly to thecash that flows from your business to you.
economy and the contraction of credit throughout the