Companies in Transition

                                                                                               June 2007

Dear Friend,

      This month the theme of Companies in Transition is monetizing your founder’s equity. Among the questions I hear frequently from owner/CEOs are questions about achieving personal financial liquidity: “How can I get money out of the business?” “When can I get money out of the business?” “How much can I increase the value of my business before it’s time to sell?” “Who can help me?” These are not trivial questions. Planning now for the eventual monetization of your equity can be just as important to your financial health as the successful operation of your business.

      We hope you enjoy this issue of Companies in Transition.

Wayne Wilson

7 Ways to Monetize Your Equity

      Most owner/CEOs look forward to the day when they can cash in some or all of their business “chips.” Many have not, however, thought much beyond the dollar signs to the process or mechanics by which the pay out can be achieved. When asked, their answer is often “I guess I will just sell the business.” And while selling the business may be the right choice (more on that later), some other options are worthy of consideration as well.

      But first, let’s consider a few preliminary questions. Your responses to these and similar questions may help to clarify the liquidity options most appropriate for your particular situation.[1] For example:

• Is your business mature or still growing rapidly?
• Is your industry stable, consolidating or declining?
• Does the business generate excess cash or require continual investments?

• Do you wish to continue working?
• Is successor management in place or available?
• Are there logical buyers or investors?

• Do you want cash now or over time?
• Do you wish to retain an equity upside?
• Do you have other business opportunities with greater potential?
• Are there other personal, family or health issues?

• Will you accept only Cash[2] or will you consider an Earnout,[3] Seller Notes,[4]Stock[5] (theirs or yours) or some other form of currency?

      If you are considering a transaction which involves a currency other than cash, the transaction really becomes an investment decision requiring that you think carefully about the pros and cons of accepting that particular currency before you proceed.

      Depending on your answers to the preliminary questions and your appetite for the available currencies, here are 7 ways to monetize your founder’s equity.

Valuation is in the Eye of the Beholder

      Most of us have heard the old expression "beauty is in the eye of the beholder." The concept is equally valid when it comes to determining the value of a company or a business. One of the first questions a valuation specialist will ask a prospective client seeking an opinion of value is "what is the purpose of the valuation?" The purpose will often determine the valuation techniques to be used which will impact the valuation outcome.

      The value realizable from the sale of a business will also vary depending on whether you are selling to a strategic buyer, a close competitor, a financial buyer / private equity firm, or a group of your employees. Why should that be?

      Different buyers may have differing plans for the business, differing opportunities for synergy, and / or differing abilities to finance a transaction, all of which can affect how much they are willing or able to pay. And the business environment at a particular point in time will also affect buyers’ appetite to pay a particular price for a given business.

      Here are some questions to consider as you think about valuation issues:

• What is my timeframe? (Now, 3 years from now, 5 years from now?)

• Who would be the likely buyers for the business? (See above list)

• What factors might affect how much those buyers would be willing to pay? (Is the business growing? How profitable is the business?)

• What can I do to improve the likelihood that someone will pay my asking price?

• Who can I get to help me?

Do you have the right Professional Advisors?

      Over the years, I have worked with numerous accountants, investment bankers, lawyers, consultants and other professional advisors. In many instances, I have served as the formal or informal leader of teams of advisors and executives working on a particular project. And some of those assignments involved hiring additional professionals to complete the assignment.

      Here are 5 lessons I have learned:

• All professionals are not created equal – Your advisors should have appropriate and relevant technical expertise to address your particular situation.

• Seek recommendations from people you trust – Reputation and referrals are important screening tools. Don’t be afraid to ask for references.

• Don’t use a canon if a rifle will do – Select the right resources to ensure that you receive the full attention of a firm’s senior professionals.

• The shortest path between two points is a straight line – Your advisors should offer practical solutions to business problems, consistent with their professional standards.

• Relationships matter – Appropriate technical expertise is a prerequisite for quality service, but chemistry and your advisor’s “bedside manner” will determine the success of the relationship over time. Trust is essential.