Outside Capital Can Put Your Company on a Solid Foundation

If you’re like most successful business owners, you have a substantial part of your net worth tied up in your company--and you will do yourself and your business a favor if you fix the problem now.

Why is this a problem? Because the business that is an extension of the founder’s ego often dies when the founder does, hurting many people--the founder’s family, the company’s employees, sometimes even the company’s vendors and customers.

The business owner who recognizes that the enterprise has a life of its own positions it for success well into the future. Indeed, the owner who does this is like the parent who, knowing that children must leave the nest, makes every effort to get them ready.

As discussed in this space in recent weeks, life insurance can play a key role in making sure that a business survives its founder. But there are other ways to achieve the same end, including many that call for injections of capital from outside sources, and the smart business owner doesn’t put off exploring the options.

What’s more, given the abundance of capital looking for work these days, you can find plenty of people willing to help ensure that what you spend years creating does not disappear when you do.

“It’s never too early to start planning and it’s never too late,” said Chris Malburg, director of exit strategies at Kibel Green Issa Inc., a Santa Monica consulting firm specializing in workouts, turnarounds and exit strategies for privately held middle-market businesses.

“When does the airline pilot begin thinking about landing? The minute the wheels of the plane leave the ground,” Malburg said.

“The same thing is true for the business owner. Everything you do in creating and growing your business should be in preparation for cashing yourself out.”

Malburg, a certified public accountant and Pepperdine MBA, is the author of nine books on business, including “Planning for the Small Business--the Cash Management Handbook” and “How to Fire Your Boss.”

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Cashing out needn’t mean losing control, Malburg said. Indeed, it often means putting your business on a more solid capital foundation than you yourself could provide so that it can grow and prosper. Meanwhile, you make your own security independent of the business.

The process involves two crucial questions, he added:

* How much money do you want to take off of the table?

* What roles will you, your family and your senior managers play in the future growth of the company?

Timing also is crucial, Malburg said, and depending on your goals, you may choose among several strategies:

* A public offering of stock in your company.

* A leveraged recapitalization.

* A merger with a competitor.

* A sale to a strategic or to a financial buyer (that is, to a buyer seeking access to your competitive edge or your revenue stream).

* A sale to your managers and employees through an employee stock ownership plan, or ESOP.

Going public can take three years or more; indeed, given the rules prohibiting insider stockholders from selling their holdings for one or two years after a public offering, it can take five years to cash out if you choose this strategy, Malburg said.

A leveraged recapitalization may take only months to accomplish, he added, and the option requires healthy financials and a strong cash flow. Under this strategy you borrow heavily against such assets as land or equipment, pay yourself a big dividend, and repay the loan with cash flow.

A merger may or may not require you continue to run the company, as may a sale to a strategic or a financial buyer. If you set up an ESOP, meanwhile, holding a stake of at least 30% of your stock, you can defer capital gains taxes on the money you take off of the table--a substantial advantage.

Whatever your strategy, if you plan properly, you create a business enterprise well-positioned to grow and prosper, Malburg said.

“The process can take some time,” he said. “If you do it right, you often make major changes in the way the business operates--and you can’t do such things overnight.

“In a family business, every member of the family has to be brought into the discussions at an early stage. If you don’t, those who feel left out have a habit of hiring lawyers and bringing everything to a stop. Everybody has to agree on the timing and the money you want to take out of the business.”

Equally important is the need for a clear view of how the company operates, Malburg said. This means diagnosing what the business does and does not do well--so that you can capitalize on its strengths and shore up its weaknesses.

Finding outside capital to carry out your plan may prove the least of your worries, Malburg said.

“There’s a lot of capital out there now, and a great many investors ready to act decisively when they see an opportunity,” he said. “The investing and lending climate is at a level not seen in many years, and one we may not see again for many more years.

“The window of opportunity is open to the business owner who takes the time to plan. If you’re thinking about doing something to strengthen your own business--and to make your own security independent of what happens to it in the future--now is the time.”

Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.