Cash Out of Your Business

July 22, 2019

Last week, I wrote about the value of digital assets and why you should account for these assets on your balance sheets. But, what if you have a profitable business and you are having a difficult time selling the business, or you have received what you consider to be a low-ball offer(s), or, for whatever reason, you just don’t want to go through the selling process. An alternative might be to milk the profits into the foreseeable future.

Remember, I guaranteed that your business will and must change to remain viable and competitive for tomorrow’s marketplace. However, you could make the decision to run your company leaner than ever before, not invest in or improve your business in any meaningful way, and treat your business like a cash cow, thus milking the profits.

The case for keeping your company

Entrepreneurs often regret selling their companies too early. One reason is purely financial. They often don’t know or are unable to invest their payout to achieve earnings commensurate with their company’s earnings. Low risk return rates are minimal, barely ahead of inflation rates. This leads to seller remorse and lower income.

For instance, let’s say your company is earning $300K a year and you sell it for a million dollars. After you pay debt and taxes, you are left with $600K-700K. Investing the proceeds in a low-risk investment portfolio (like treasury bonds or munis) will earn around $25K per year. Before you sold your company, you were among the top earners in the US; now you are among the lowest earners.

Even if you have accumulated wealth over the years from operating your business, keeping your business (longer) is a way to diversify your wealth. Small private company returns are not correlated with the stock market. As a prudent investor, you want to stay diversified.

Many small business entrepreneurs get personally attached. Try to remain objective and seek to maximize your total long-term net worth.

If a sale is not equitable or feasible

Potential acquirers strive to minimize acquisition risk by offering to pay as little as possible for your company. When the offered price is not commensurate with the company’s value, consider other options.

If the offer seems unfair, hold on to your company while seeking other buyers. Profitable companies are often worth keeping. By deciding to hold on, you can maximize the cumulative earnings potential from your business.

Your backup plan can always be a soft-landing option.

Soft-landing option

When you are the sole business owner, you have the option of running your company for as long as its life span allows. When the business stops netting you the profits you seek (and if you cannot sell it) you can “soft land” it.

After you reaped the harvest and the company cash flow has dissipated, you can shut it down or sell off assets if there are no buyers to be found.

Reasons for disruption

Disruptive forces in the industry may render the business non-viable. Unfortunately, it’s hard to predict when and where disruptive forces will have a terminal impact.

As an example, GlobalVision is in the translation business. Experts have predicted the demise of translation for decades and they are still predicting its demise. By operating the business till the damage happens, you can extend your income stream longer than originally anticipated.

Stronger competition or the commoditization of an industry provides a second scenario. This doesn’t happen overnight. Price erosion is often an indicator. You can compete as a small business owner by becoming more agile.

A third reason is the loss of interest by the owner of the business. Complacency, burnout, or lack of a challenge may cause change of heart. You can hire someone who is competent to manage the business.

Reasons for keeping your company

Not convinced yet? Here are a few reasons why you should seriously consider keeping your company for as long as you can:

Golden eggs

You have toiled to get to this point, so why sell the golden goose when it’s laying golden eggs? Often holding onto your company for three or more years will net you more income than if you sell it. You will maintain your full equity position in the company and it will provide you with a diversified portfolio and an income stream.

Minimize exit planning and distractions

By not working toward an exit strategy, you can eliminate the time and money involved in getting the business ready for an exit. You can take advantage of all legal tax incentives to reduce your tax payments. This will enable you to keep more of your hard-earned income and invest elsewhere.

Depending upon how you choose to run the business, you may be diminishing profitability and, therefore, the value of your company. But if you are not selling it, who cares? The lower value is only on paper. In practice, you are minimizing your taxes and maximizing your net income. The latter (maximizing your net income) will raise business value as long as your business isn’t skeletonized.

Working toward an exit demands your time and energy, both valuable commodities for CEOs and business owners. Direct your efforts toward building the company’s sales and profits or hire someone who can accomplish this for you while you lay on the beach.

Maximize tax deductions

If you are not pursuing an exit, then you no longer need to be obsessed with increasing the value of your company. You can seek legal ways to minimize taxes while maximizing earnings. Invest tax savings in other ventures and diversify your portfolio to hedge your risks. Savvy business owners should seek diversification. Your business is a great way to enable you to build wealth.

Exit options

Astute CEOs and small business owners should comprehend their exit options. They must understand the present value of their business and more importantly, its long-term net potential.

This time the double-edged sword may be all in your favor. In the process of increasing revenues, reducing costs, streamlining processes, prolonging the life of your business, will result in increased cash flow. These factors can significantly increase the value of your company and eventual selling price, sans soft-landing. If you receive less money at exit, you will still be ahead when you consider the profits you have been receiving for several years.

Please contact me at dennis@Time4Exit.com if I may be of service to you.