Ways to cash out of your business

Income ideas panel


Wednesday, February 14, 2018

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MANY business owners have significant capital tied up in their business. And if you are ready to take the leap to sell your business or even a part of your business to unlock the money you have put into it, our income ideas panel discusses how to cash out intelligently.

Selling a business isn’t simple, but most entrepreneurs have more options than they realise. You can sell a part of your business, you can sell assets you own — many options.

Or if there’s no such buyer and the business has a healthy cash flow, the company might take on debt to buy all or a portion of the owner’s stake.

So it pays to know the pros and cons of several ways to cash out and to think carefully about which is the right fit for your business and you.

UWI researcher, Dr Carolyn Hayle explaines, “Let us look at some of these issues that could lead to selling the business — estate and gift taxation, divorce litigation to allocate business purchase price among business assets, to establish a formula for estimating the value of partners’ ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate settlement.

Bottom line is that business owners must always have an exit strategy for leaving the firm.

Another positive reason for selling your business is that your company may become attractive to others and can be sold at a premium. You can only seize that financial windfall if you are able to negotiate based on the true value of the firm.

Most business owners, especially in small countries, find it very difficult to accept the notion of selling his/her company. However, in growing your wealth this too could be a viable vehicle for wealth creation.”

Attorney-at-law Robert Taylor says, “Anyone selling a business must realise that certain prepatory steps must be taken to ensure that the business value is maximised.

Business owners, whether or not they plan sell the business, should always take steps to ensure the business is generating cash flows and certain business practices are in place to ensure good governance.

A sale of 100 per cent of the business is an option, however, many owners may wish to remain as an opertating shareholder and sell a portion of the business to a passive investor, or they may wish to become the passive investor and allow a new owner to step into the business.

Whether all the shares are sold or partial interest, it is important that prior to the sale the business owner take steps to ensure that business profitability is being maximised to improve the attractiveness of the business to a potential purchaser or shareholder.”

Businessman Dino Hinds adds, “There are a number of reasons that owners might choose to sell a stake of their business. The most popular reason of course is to raise capital for the expansion of the business.

There is, however, also the business owners who have spent many years building a company and are looking to reap the benefits of all the hard work, and is therefore looking to cash out.

In this case the owner might look to sell a part or 100 per cent of the company. There are sometimes strategic reasons to sell a stake in your company. One such reason could be to gain market share.

If your company is being partially acquired, for example by another business with greater distribution channels more brand recognition, this could be a way to grow your brands. Getting ready to be listed on the stock exchange is something that all companies should practise from day one.

This is whether or not listing is actually their ultimate goal. This is because the steps such as good corporate governance, a strong board, excellent record keeping, are things we should practise daily in our business.”

Of course the Jamaica Stock Exchange is the ultimate for many people who wish to cash out of their business.

Taylor cautions however, that, “in relation to equity, the view should not be that you don’t have to pay back investors as, in fact, investors are seeking dividend or at least capital appreciation over time when the business prospects improve, as does the price earnings as well as the share price.”

And as Jamaican businesses become more mature in their approach to expansion, this creates career opportunities, which Hayle explains.

“Some people find it very difficult to comprehend that a business is not something that you keep in perpetuity. Valuation is not just an accounting function, but it does hinge on the financial management of your company as expressed in accounting terms.”

Taylor adds, “A professional valuator may be a worthwhile expense, as the valuation will add credibility to the ask price and potential purchasers may have more reassurance about the value and the basis of the asking price.”

Hayle continues, “The actual valuation is an accounting function but if you were not managing the business efficiently and effectively it will be difficult to arrive at the true value of the company.

Business valuators should have a very strong accounting background and qualifications. In some jurisdictions, valuations can become charter business valuators, and some have wide-ranging backgrounds including commerce, accounting, law, and economics. ”

Hayle adds, “Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business.

Financial market participants use valuation to determine the price they are willing to pay or receive to affect a sale of a business (Wikipedia search February 5, 2018).

A business valuator exercises these processes and procedures to arrive at a figure. Sometimes the objective is not to sell the business, but a dispute may arise for which the only solution is the sale of the business.”

And so where do you find the people with the cash for your business? Hinds explains, “When the environment is right you will always have persons looking to invest in the real economy.

To find these investors as a business person you will just need to do some research. In our Jamaican context, companies such as the Development Bank or other government agencies can help to point us in the right direction.

You can also speak to an investment banker, who most times will be able to assist you in getting ready to raise capital and then helping you to find that capital. If all else fails, you can place an ad in the papers advertising your business for sale.”

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