In a recent post, Managing Private Wealth: The One Percent Solution Examined, the outline of the concept was provided. In short, The One Percent Solution calls for business owners to treat their investments in their businesses as investments. A hallmark of managing liquid wealth is the payment of management fees, say 1% of assets under management, for example. If business owners think similarly about managing their private wealth, they will attribute a “management fee” of some amount, say 1% of the value of the private company assets they control, as the budget for managing their illiquid, private wealth.
A number of One Percent Solution Activities were identified in the earlier post, including wealth manager compensation, annual appraisals for monitoring performance, buy-sell agreement pricing, life insurance funding, estate planning, and others. It is now time identify a number of One Percent Solution Strategies for managing private wealth.
Liquidity and Diversification Without Selling
Business owners often think of ownership in binary fashion: “Either I own the business, or I don’t. I’ll just keep it until I sell it, and that’s that.” It is a fact that every business owner will sell his or her business, either partially or totally.
Consider the options in the Ownership Transfer Matrix:
The Ownership Transfer Matrix identifies many of the things that can or will happen to cause owners of closely held businesses to sell some or all of their investments.
The interesting thing about this matrix is that there is no way out of the boxes. Many owners of interests in closely held or family businesses may “sell” or transfer portions of their interests, either willingly (like in gifting programs) or unwillingly (as in a forced redemption in a shareholder dispute).
Every owner of an interest in a business will “sell” or transfer his or her entire interest, if only at the time of death. As they say, “You can’t take it with you!”
Owners who follow The One Percent Solution will be working with appropriate advisers to make conscious decisions regarding partial sales or transfers during their lifetimes. Reasons include sales of partial interests to diversify ownership and net worth, gifting of stock to family members, sales of stock to insiders, or members of the management team, and others.
Owners who follow the The One Percent Solution will sometimes plan to sell their entire interests in their companies. This could mean selling the entire company on a planned basis, or selling a particular owner’s entire interest to the company, other shareholders, or outside owners (like private equity firms or other capable investors with interests in illiquid assets).
A number of financial tools are available to the typical, successful closely held or family business to assist in the investment management objectives of creating liquidity, diversifying wealth, reducing risk, and enhancing returns.
Unfortunately many of these tools are overlooked not only by business owners, but by their advisers, as well.
Valuation firms with investment banking experience or dedicated m&a advisers may be well-suited as sources for expertise to implement many of these basic corporate finance tools.
Corporate Finance Strategies/Tools for Private Businesses
The following list provides more than 10 legitimate, effective, and available techniques to create shareholder liquidity and cash flow, enhance business performance and returns, and provide opportunities for overall portfolio diversification. Not all of these will be appropriate for all companies at all times, but most may be appropriate for consideration under specific conditions and circumstances.
Key benefits of the various strategies include:
- Enhancement of returns on equity
- Enhancement in earnings per share
- Acceleration of cash returns
- Enhanced performance and reduced business risk
- Optimization of capital structures of companies
- Liquidity for shareholders independent of their companies
- Ability for shareholders to diversify their portfolios
One Percent Solution strategies are tantamount to applying modern investment theory concepts and basic corporate finance principles to private corporate America. In subsequent posts, we will examine at least a dozen corporate finance strategies that can be implemented by private businesses to accomplish the benefits outlined just above. These 12 strategies for managing private wealth include, by introduction:
- Establish a dividend or distribution policy
- Declare a special dividend
- Engage in a dividend recapitalization
- Repurchase shares of stock from owners desiring liquidity
- Execute a leveraged stock redemption
- Execute a combination share redemption and special dividend
- Partial management buy-in via installment sale
- Management buy-in with outside equity
- Seek a private equity investment (for liquidity and/or growth)
- Conduct a private equity recapitalization
- Install an Employee Stock Ownership Plan (ESOP)
- Accomplish a private merger with a partial redemption
We will examine these strategies and, perhaps more in following posts as we put more flesh on The One Percent Solution.Stay tuned.
As always, if you wish to talk with me about any business or valuation-related matters, or to discuss management or ownership transition issues in complete confidence, give me a call (901-685-2120) or email (email@example.com).
Until next time,