Do you have a liquidity strategy for your investment in your privately-owned company?
So your privately-owned, closely-held company is a “cash cow,” in a niche industry with a very bright and certain future (i.e. not challenged by foreign competition or changing technology). It has a “clean” capital structure and solid management team following a detailed succession plan. And you are in good health and less than 50% of your net worth is locked up in your company’s stock . You own 100% of your company or have great partners who have the same short- and long-term company and personal goals as you. And the thought of selling all or any part of your company in the next 5-7 years hasn’t crossed your mind.
Congratulations! You are NOT like most privately-held business owners who:
Operate in industries that have uncertain futures and that are continuously challenged by technology changes and foreign competition - and do not have the knowledge, scale and/or capital to make the necessary changes;
Have ongoing management challenges and do not have a detailed succession plan;
Have most of their personal net worth locked up in their companies and have not yet diversified their personal investment portfolio;
Have “messy” capital structures, resulting from private placements or employee stock programs; and/or
Have partners with different company and/or personal goals.
Every closely-held business and its owners should consider the liquidity options available for their business and should have a liquidity plan for their investment. And because most experts believe that significantly higher capital gains tax rates will be implemented in 2009, there may never be a better time from a tax standpoint to liquify some or all of your investment in your business and diversify your personal net worth to a better-balanced investment portfolio.
A liquidity plan can take several forms, from an outright sale of the company to one of the many forms of recapitalizations, or “recaps,” that can provide liquidity for a portion of your or your fellow investors’ ownership interests . Recaps can be done for the sale of a majority or minority interest and can provide liquidity to buy out a partner, clean up messy capital structures or to just take “some of your chips off the table.”
There are many private equity firms looking to purchase and make investments in privately-held companies, and the valuations used to make these investments are often very attractive. Despite the recent noise in the credit markets, there are also plenty of institutional lenders still active in providing financing for leveraged recaps that do not include adding a private equity partner.
Calfee would be happy to discuss the importance of developing a liquidity plan for your privately-owned company as well as assist you in developing and implementing one before investment tax rates adversely change.
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For more information, contact:
Doug Morgan
614.621.7011 Phone
dmorgan@calfee.com
Scott Wilson
216.622.8376 Phone
swilson@calfee.com
