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Perspectives

Harvesting your wealth

Optimizing shareholder liquidity

When it’s time for a transition in your business, realizing an attractive investment return is often the goal. A healthy return on investment is the payoff for years of hard work, sacrifice, and financial risk. Because assigning an actual value to your business can be challenging, this report offers information and insights on strategic liquidity alternatives.

Transaction timing

In the wealth-harvesting process, transaction timing—more than any other single factor—can increase a private business owner’s wealth from a shareholder liquidity event. Both macroeconomic and microeconomic factors can influence this timing.

Macroeconomic factors—economic as well as political—frame the assessment of enterprise value and the relative worth of the financial assets owned by private companies. The company’s performance, financial condition, near-term expectations, management depth, and business succession plans can significantly affect enterprise value.

The following shareholder considerations can make wealth harvesting even more challenging:

  • Company legacy
  • Family ownership continuity
  • Employee and community loyalty
  • Investment risk tolerance

Amid all these factors, determining which shareholder liquidity alternatives may yield the most benefits for private business owners typically requires experience, commitment, discipline, and favorable timing.

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Economic influences

Growth in developed economies has significantly improved the global economic outlook, while a tightening in US monetary policy is causing a slowdown in these markets.

  • Recovery has finally begun in the Eurozone, but many investors still have mixed views on growth prospects and sustainability in some countries.
  • Asian economies continue to strive for a balance between promoting growth while curbing inflation.
  • Africa is the fastest-growing continent, with real incomes increasing 30 percent in the past 10 years. Gross domestic product (GDP) is also expected to rise about six percent per year over the next decade.

In the US, conditions seem to be improving slightly despite uncertainty created by lawmakers and broader global issues. Many investors are looking to the new Federal Reserve Board leadership for clues regarding how the central bank will transition to a more traditional stance without causing the economy to revert to a slow-growth path.

Developed countries are driving current economic growth amid relatively strong investor confidence and are increasing corporate profits.

Capital market signals

Competition to complete deals has remained strong over the last several quarters, leading to strong valuations among both financial and strategic acquirors. Financial sponsors are increasingly bidding up valuations as they seek returns for large amounts of capital they have raised.

Important considerations for private business owners include:

  • Continued broad advances in public market equities over the past 12 months indicate investor confidence and willingness to incur some risk for a potentially higher investment return.
  • Recent M&A activity has remained steady among smaller private companies.
  • Credit availability and debt costs are currently favorable for privately held, middle-market company transactions.

Stock market confidence, credit availability, and M&A activity bode well for private business owners who are considering liquidity alternatives.

Shareholder liquidity transactions

Maintaining flexibility throughout the liquidity process can increase investment competitiveness. An example of this is preserving the board’s ability to transition to internal liquidity strategies (frequently referred to as “hedge strategies”), such as debt recapitalization or an employee stock ownership plan (ESOP).

While typically providing less liquidity, these strategies don’t require a change of control or material corporate governance alterations. The hedge is derived by maintaining the ability to effectively execute a material liquidity event if the board is underwhelmed with the market test response.

Typical capital sources for hedge strategies are excess corporate cash, senior-based asset and cash-flow lenders, and subordinate debt and mezzanine providers. When executing a market test/hedge strategy, the ability to seamlessly transition to a transaction alternative without losing deal momentum can reduce the risk of an aborted shareholder liquidity event.

Shareholder liquidity transactions can be life-changing events. It’s essential to approach the process strategically to understand the many alternatives available and what factors affect their potential risks and rewards.

The time to start

Macroeconomic and capital market conditions in 2016 appear to be favorable with respect to a critical factor for shareholder liquidity transactions: transaction timing. If you decide to explore the many alternatives available, prepare yourself for an exciting but demanding process.

A disciplined transaction approach, along with the experience and resources of a well-regarded corporate financial adviser, can help you address many of the risks that lead to surprises and disappointment. You’ll be better able to understand what to anticipate from a liquidity event, choose a path that’s likely to produce the ROI you expect, and gain insights into important decisions and milestones you’re likely to face on your path forward.

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