Think about dividend recapitalization.
Want to monetize some of your business’s equity before turning over control of your company or retiring? Use dividend recapitalization to release some of your company’s equity for personal use.
Let's say you’re the sole owner of a firm with very little leverage, an EBITDA of $5 million annually, and a book value of $20 million. You’ve kept cash in your business to help fund expansion and haven’t sold any equity. Your company is thriving, but your personal financial growth is lacking.
You could extract $15 million from your company’s equity without creating excessive leverage or leaving your business cash poor. If you take out $5 million in cash and secure a 7–year–term loan for $10 million, your company’s $5 million annual cash flow will be more than enough to pay back the loan. And you’ll have $15 million to invest toward your personal financial goals.
Consider partial buyouts.
Businesses with multiple owners can allow partners to buy shares from each other through equity extractions. For financially stable companies, these buyouts are usually straightforward transactions.
Sometimes these buyouts can include special provisions, like deferred compensation arrangements, an extension of benefits until age 65, or a company-financed vehicle. If your selling partner doesn’t want to be paid over time; you can use a combination of cash and debt financing to settle that buyout.
Let’s say you’re one of three equal partners that own a business worth $21 million. If your company needed to buy back stock totaling $7 million from one of your partners, that buyout would typically consist of $2 million in cash and a 5–year–term loan to cover the remaining $5 million.
If one of your partners passes away, you might have to deal with that partner’s spouse, children, or estate executors who are not active in your business. With a designated buy-sell agreement in place specifying the distribution of equity in the event of a partner’s death, you can ensure your company’s operations continue functioning normally. Key person insurance can help fund these buyouts so they don’t burden the business.
Gain peace of mind with buy/sell agreements.
Buy/sell agreements can help avoid conflict during stressful business transitions and:
- Provide your heirs with a buyer for your interests.
- Offer cash to buy out the interests of a deceased partner.
- Establish your company’s value for estate tax purposes.
- Prevent the forced sale of your business at a reduced price to an unwanted buyer.
- Set a fair market price that lets you pre-plan estate and tax obligations.