Cash in without selling your business

By David Shlagbaum | April 3, 2014 | Last updated on April 3, 2014
3 min read

When you’re grappling with the decision of whether to sell your family business or continue running it, there are a lot of things to consider. But before making any tough decisions, remember that it doesn’t have to be an all-or-nothing proposition.

Here are three ways to cash in on some of the value of the family business without putting the company up for sale.

Family share sell-off option.

Your children would like to acquire an ownership stake in your business. You’d like to accommodate but are wisely against the notion of gifting the business to your children. You’d also like to cash in on a portion of the current value of the business.

A partial estate freeze lets you accomplish some estate planning and put some cash in your pocket while also getting your children to demonstrate commitment to the business by putting some skin in the game.

How does it work? The business is valued and you trade your common shares for a class of special shares having a value equal to that of the business. A new class of common shares is created to which you and your children subscribe, for nominal consideration, based on an agreed upon ownership ratio—you can dictate the percentage of the future growth in the company you’ll retain.

Your children use their own or borrowed funds to buy a portion of your special shares and you may be able to use a portion of the capital gains exemption to shelter a significant portion of the purchase proceeds. The bulk of the existing value is captured in your remaining special shares, which can be put on a purchase or redemption schedule, and you still have an opportunity to share in the future growth of the company along with your children. A special class of voting shares will continue to assure you of voting control of the company.

The conversation should, however, begin with a determination of whether there are shared values, a shared vision, common goals, acceptance of risk factors and a three to five year business plan. These and significant partnership and succession issues need to be fully aired and should ultimately find their way into a shareholders’ agreement.

The Private Equity Option.

If your company is well-managed and marketable, you may be attractive to a private equity fund or a venture capitalist that will buy an equity interest in the business and allow the owners to take all or a portion of the sale proceeds while continuing to maintain an ownership interest.

Some of the questions that will be relevant to the sale include: Are these outside investors likely to be good partners? What strategic benefits do they bring to the table? How much operational and strategic control will I have to give up? If I ever want to buy back their interest, can I do it and how expensive will it be?

Among other issues, governance and decision making policy, agreed liquidity events, buyback and buyout options, dividend policy, and compensation policy will need to be discussed.

The Employee Sale Option.

You’ve got a number of key employees. They represent a significant portion of your goodwill and you want to provide them with an equity stake in your company to incentivize a long term commitment to the business. But they don’t have the money to invest. At the same time, you want to take some chips off the table. How do you do it?

Do a partial estate freeze, similar to the one in the Family Sale Option, but with a twist. Instead of the employees putting up the money to buy, say a 30% equity stake, the company borrows the money from the bank and uses the proceeds to redeem 30% of the existing share value from you.

You all then subscribe for new common shares for a nominal amount and based on a 70/30 split. Until the bank loan is paid off,the employees’ 30% equity stake isn’t worth anything.

But after the bank loan is paid out, even if there is no growth in the company’s value in the intervening period, the employees’ sweat equity earns them a 30% equity stake in the business.

In the end, you may choose to sell your company outright but never forget that you have options.

David Shlagbaum is a lawyer/family business advisor and a partner at Robins Appleby & Taub LLP.

David Shlagbaum