Whether you’re thinking about a liquidity event before you’ve launched your company or the thought comes much later, there’s a lot to consider before you cash out.

Liquidity events rely on strong planning and execution — as well as good timing — to achieve the desired outcome.

“A business owner might say, ‘My business is doing really well. If I wait a few more years, I’m going to be able to sell it for a lot more money,’” says Ken Marblestone, managing director at Cascade Partners. “That’s possible. But at the same time, you need to consider: Are the multiples going to be the same when I sell the business three years from now? Or are they going to come down? It’s not quite as easy as saying, ‘Let’s just continue growing earnings and we’ll sell it for more later.’”

Following a thoughtful process can help you address important concerns and identify the right solution for your business.

This week, Marblestone and Cyprium Partners’ Beth Haas talk about the path to liquidity, and why liquidity events work best when you’re clear about the end goal.

Every deal looks different

Marblestone once had a client, a family business, in which family members were concerned because they didn’t have a lot of money in the bank. The solution for the company was not to pursue a sale, but rather to go out and raise capital.

“A lot of dollars were raised, and the owner of the business took the money and paid dividends out to different family members that were owners of the business,” Marblestone says. “The family continues to own the business to this day. When I talk to the CEO, what I always hear is that it really changed the dynamics for the family.”

By going through the process of raising capital, the family could put some money in the bank, ease their fears and get back to growing the business.

“It has allowed the business to do better because the family is not so concerned about risk,” Marblestone says. “It really freed up that whole dynamic and allowed the family and the team to make decisions focused on what’s best for the business.”

The need for capital can arise in numerous ways, says Beth Haas, a partner at Cyprium Partners. It could be that the company wants to fund a new facility or buy a competitor.

“Perhaps they have one shareholder who wants to exit the business and needs to get bought out, but the others want to continue to run it,” Haas says. “Sometimes it’s a dividend. They’re starting to think about their own estate planning or wealth diversification. It really starts with something going on in the business that requires additional capital, but they don’t want to sell the company.”

As Haas told Dealmakers last summer, every deal looks different. But a comprehensive evaluation of the situation can help guide owners to a positive result. “Part of what we try to do is to help understand what their objectives are, and try to structure a transaction that is going to be suited to the particular needs of the business,” she says.

Inform your decision

When you’re in the early stages of thinking about liquidity (and the possibility of selling your business), Marblestone finds it helpful to sort concerns into three buckets: personal, business and financial.

  • These are issues dealing with you, your family, your view of your career and what life would be like if you sold your business. “You need to take time to think through some of those personal and psychological issues,” Marblestone says. “You also get into issues like, ‘What do I want for my employees? The building? How important is it that the new owner maintain this building and continue to operate out of it?’ Those are really difficult issues that need to be thought through and considered.”
  • How do you and your business fit into the overall marketplace? What could you do to better position your business and separate from the competition? Buyers are always interested in the sustainability of the business, and how they can not only keep the business growing but accelerate that growth and improve the margins.
  • This gets into the due diligence process and your ability to create accurate information about your business, your customer and your margins. Can you successfully go through a due diligence process that takes a lot of work and preparation?

If you decide you are ready to sell, it’s usually a good idea to follow your gut — especially if that alternative is to stick around and give less than your best effort.

“There are times where a business owner should just say, ‘I’m just going to sell it. The incremental dollars are not worth it to me,’” Marblestone says. “Dollars are important, but they are not everything.”

The goal of going through a thorough process that examines you and your business from all sides is to sort through your goals and aspirations, and create one cohesive strategy that can help you achieve that desired outcome.

“I have one gauge for whether a process was successful or not,” Marblestone says. “What does the business owner think of it afterward? That summarizes a lot of different things. Was the valuation reasonable? How did it work out for them? How did it work out for the family and the employees? How does that business owner think about it one or two months later, one or two years later?”

Related post: When sale prices get high, buyers need more to achieve a desired return