By: Tim McDonald
The View from Outside the Marketplace
In the universe of public companies, monetizing the value you’ve added as a founder and nurturing CEO is no problem. It’s possible to start selling shares any time after the lockup period for the initial public offering (IPO) ends. And monetization can take place over an extended period of years. By the time you’re ready to retire or move on to another venture, your stock holdings can be at an optimal level.
If you own a private company, the passage of monetization is decidedly less smooth. You must sell your business as a going concern or a collection of assets in a relatively limited time. And you must incur the various transaction costs of selling, such as search costs (locating a buyer) and verification costs (weeding out those who are simply looking for information).
Paved with Gold
There’s no doubt that you made the right choice in going into business. Seventy-three percent (73%) of business owners believe that business ownership provides the best way to create wealth. In addition, self-employed individuals have been found to have a net worth that is 362 percent higher than that of their salaried brethren.
However, the route to riches is a rocky one. According to SBA data, about one-third of businesses with employees fail before the business reaches its second birthday and only half of those businesses are around after five years. Strangely enough, survival rates appear to be independent of economic conditions. Just as many businesses fail in good times as in bad. In addition, survival rates are similar across industries, belying the myth that some businesses, like restaurants, are more likely to fail.
Nevertheless, the chances of becoming a millionaire are greatly improved. Two-thirds of working millionaires are self-employed although the self-employed only comprise about 20 percent of the labor force, say Thomas J Stanley and William D Danko in The Millionaire Next Door: The Surprising Secrets of America’s Wealthy.
Some three-quarters of these self-employed millionaires are businessmen and women.
All the Eggs in One Basket
Most companies, large and small, finance future growth and existing earning capacity primarily from profits. They only turn to banks and the markets when extra funds are needed. However, those profits are the entrepreneur’s earnings or pay and, if not distributed, amount to saving. In the internal economy of the firm, investment will always equal savings, much as Keynes and Hicks said it would in the macro economy.
The growth of your private company is, then, rather like someone’s 401k, where an individual makes contributions to an IRA and those funds are invested to earn more. It turns out that about 70 percent of the typical small business owner’s net worth is tied up in their private company ownership. And while this is a good investment, it is a highly illiquid investment.
What’s Your Exit Strategy?
Not having an exit strategy for the investment in your business is as risky as not having a fire escape for the building in which it is housed. Of course, the majority of buildings never face the hazard of fire. But, some do… and that is when that emergency route out of the building ablaze shows its value.
Exit strategies come in many forms and flavors. In the end, they’re simply designed to extract the value of your investment from the business you’ve built. Maybe, someone in the family might be willing to buy lock, stock and barrel from you. Perhaps, your senior captains might want to take full responsibility for the ship with a management buyout (MBO). Or, some enterprising private equity (PE) outfit may see ways it can add value by, say, a merger with a similar company to capitalize on economies of scale or scope.
As we’ve hinted before, one true and tried route is going public. The SEC continues to make selling shares to the public subject to less onerous restrictions. Typically, under the Securities Act of 1933, a company going public must file a registration statement on form S-1. However, your company may qualify for any one of several exemptions from the registration requirements of the Securities Act.
The latest one to take effect is Regulation A+, which is intended to ease the burden of Securities Act registration for small public offerings. Now, up to $50 million can be raised from the public in a Regulation A+ offering over a 12-month period.
Plans are Nothing; Planning is Everything
As that famous quote from Dwight D Eisenhower reminds us, the primary point of planning is not to construct some perfect blueprint, but to get us thinking. Naturally, as you think about the future, certain courses of action will suggest themselves. You will, of course, want to gauge the present market value of your business and how you may augment it. Remember that a business valuation consists of two components. The first is the earning capacity of the assets in place. The second is the future earning potential of the business. The value of the first aspect of your business may be all you’re thinking of. However, a look at the NASDAQ will show that many astronomic valuations depend on a company’s future prospects.
Riding Into the Sunset
You’ve devoted your life to building a successful business. It hasn’t all been plain sailing. There were times when things hung by a thread. Yet, you and the business survived. Now, it’s time to think of an exit strategy: one that takes into account your personal and financial goals. For more information on how to proceed, please contact…