Your Exit Strategy: Turning Illiquid Assets into Cash
As an entrepreneurs and business owners we can get so focused on the day-to-day aspects of running a business (or sometimes just surviving!) that we forget the long term picture. It pays to raise your head up from time to time.
For instance, do you have an exit strategy?
OK, don’t laugh. I know for some of you the exit strategy you’re thinking of may be nothing more sophisticated than a gurney on the way to the funeral home. 
But if you have plans to retire before that day occurs, or if you want to ensure you leave a legacy for your kids or involve employees in ownership, then you’ll want to find time to think about that exit strategy. Here’s why:
” … [I]f you wish to share equity with your employees or with your heirs, it is important that you start early, when the company valuation (and share price) is low. U.S. tax laws severely limit gifts to heirs; hence, it will take many years to pass the business on to children. Assuming the company experiences consistent growth, sharing equity with employees can be rewarding at any stage in the business cycle. However, transferring total ownership to the employees, including the sale of your shares, is more easily accomplished by starting early, when the company valuation is low. * * *
The proceeds from the sale of a private company are usually for cash, for shares of a public company, for shares of a private company, or for a combination of the above. This is generally a move toward greater liquidity in your personal estate. You are selling illiquid shares of your private company for cash and/or shares of a public company that will eventually become liquid.
This allows the successful entrepreneur, who often has nearly 100 percent of his or her assets tied up in the business, the option of diversifying his or her portfolio of investments. Some entrepreneurs sell to other private companies and achieve asset diversification by becoming
part of the larger, merged business. While immediate liquidation may not be their primary driver, entrepreneurs who take this course usually move closer to a liquidation opportunity.”
The above quote gets at the major downside of small businesses: they eat cash. Some lucky percentage of small businesses throw off good cash flow, but I’d say the majority do just the opposite and scarf up cash like the Cookie Monster gobbling cookies. And of course we’re always scratching around for money, because it’s all tied up in the business.
Mind you, I’m not complaining about owning a small business and neither should you (never complain, just do something about it). But if you can plan to eventually draw out the cash that you’ve put in, wouldn’t that be a wonderful end goal?
For more about exit strategies, read: Choosing Your Exit Strategy at the Biz Info Library.
