What If Owners Took Liquidity Now?
A profitable software company decided to sell but initial valuations were below their expected value and they wanted to be patient and wait for potentially higher offers. Management was confident that business would be more valuable with each passing month, so an interesting question was then raised. ..
The fall of 2010 was not exactly a robust business environment and changes in political administrations likely meant the repeal of the capital gains tax rates. Worried that that would only go up and interested to fund a ‘special dividend’ to help owners get some liquidity (at an attractive after tax rate), a local company asked us to help them explore financing a ‘special dividend’ to the Company’s owners.
In order to ensure we closed before year end (to get current tax rates) we quickly pulled together a business and financial plan and got it in front of about 50 very different lenders. What came back were financing alternatives that ranged from $2 million to over $8 million+. The rates and terms varied widely. Some wanted personal guarantees, while others wanted part ownership (i.e. called warrants). What the Company ultimately chose was a lender that offered $4 million of financing at a floating rate that equated to 7% at the time of the offer. This note also did not require personal guarantees – making it true liquidity for the owners without additional financing risk to them personally.
When & why owner liquidity strategies make sense
Most owners only think about getting liquidity when they sell a business, but taking liquidity along the way can make sense for several reasons:
1)Diversifies wealth and creates opportunities for smart planning
2)Allows owners be more patient about selling
3)Creates buy-in opportunities for management
In general, taking liquidity can make sense if the financing doesn’t put the company under a burdensome debt structure or have personal recourse back to the owners and as this “what if” illustrates, these strategies are possible in even today’s financing environment.