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Cashing out, but staying in

Guest post by: Guy Rigby

Article Overview: We see a lot of business owners wanting to take cash out of their business, but without selling up or losing control. At the moment there are many owners who had planned on selling their businesses by now, but as a consequence of the recent difficult times, it just hasn't happened - the clocks have been forcefully turned back. So, instead of selling, they may want some liquidity to provide security for themselves and their family. Another scenario where cash may need to be taken out is when, for example, there are two shareholders and one of them is retiring. Unless personal funds are available, the shareholder who is staying in may not want to be left with burdensome debts when his partner is safely out, so may also like some cash.

Cashing out, but staying in

One option worth considering is to sell part of the business to private equity and then sell the rest in a few years' time. Conceptually, you are de-risking your investment by taking some cash out. Private equity houses have differing views on this - some will do it, some won't and some will do it a little bit. This depends on how much is taken out of the business and how much stays in, as private equity investors believe business owners are much more motivated when they have a significant financial interest in the business.

One possibility for getting cash out and passing the business on to the next generation is a vendor-initiated management buyout (VIMBO). Let's say a father sells his business to his daughter for £2m in cash (funded by a bank, based on security available within the business) and £4m in vendor loan notes. Loan notes are a popular way of keeping the business in the family if one member wants to retire. Essentially, they are an 'IOU' issued by the acquirer, which is to be paid off over an agreed period as the company makes profits. This can be tax efficient for the seller, much cheaper than private equity and can generate reasonable yields. There is low transactional risk and banks quite like loan notes as the seller retains a stake, is often involved on an ongoing basis (perhaps as a non-executive director) and is incentivised to help grow the business. Once the loan note has been repaid, the daughter will fully own the company.

Loan notes are attractive for family-owned businesses because the deal is private and can offer minimal disruption to the underlying business. As it is not private equity, management won't be expected to sell in three or four years' time and the business can stay in the family.

On the downside, buyers may have to agree to do certain things in exchange for the loan notes, for example, pay interest, limit shareholder salaries or not take dividends.

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Article Tags: business owners, cash, liquidity, sale, shareholder



Related Forum Posts
Re: Going Back to Work after After Having Kids - This is definitely a personal issue that everyone has to try to figure out on their own. By that, I mean that even when I thought I would love being a stay-at-home mom, in actuality I became quite lonely and needed some adult conversation. After 2 years of staying home with my son, I felt that we both needed to get out more so I went back to teaching at that time, and he went to pre-school, which I felt was great for his social skills. 2 years just happened to be the number for me. Like I said, everyone is different and probably won't know for sure what is right for them until they try. Unfortunately, with the way the economy is right now, many people may not get the choice. Their money is needed. But for those fortunate enough to be able to do what they choose, I say give staying home with the child a shot. I was so glad I did it for as long as I could. Especially now when I see how fast he's growing up and realize that soon I won't see him on a daily basis any more. I treasure the things that I wouldn't have gotten to see (his first steps, his first words, etc) if I had been at work.
Re: Suspicious/Problematic Users - Thanks for staying on top of things GT!
Re: Alexa Ranking Goals - wow, Congrats Evan on staying focused on the goal and an applause to everyone on the forum for helping out...
Re: Jan 18 Triple Crown Leaders - I'm sitting in 3rd on the forum part and it doesn't look like I will be getting any higher than that. Good job to Yinka for staying in the battle with GT this round. He usually runs away with it.
Re: Suspicious/Problematic Users - Hi Trent, Thanks for staying on top of things. Greatly appreciated. All problematic users IP banned and posts deleted. Cheers, Ringo


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