The hire and retire[1]
approach to equity monetization is sometimes simpler and more lucrative than many
other methods – there is no transaction to be negotiated or financed nor large
amounts of income taxes to be paid all at once. On the other hand, your equity
value is available only over time rather than all at once. It all depends on
the circumstances and your own personal objectives.[2]
These examples illustrate some of the possibilities:
- A real estate consulting firm – The founder had invested start-up capital from his own resources. Rather than ask new principals in the business to “buy in” when they were hired or promoted, he paid himself a preferred return on his accumulated equity capital before residual profits were divided among the principals. At retirement, instead of selling the business to his partners, the founder opted to pay himself an even larger preferred return with future increases in retained earnings accruing to the active principals.
- A heavy equipment dealer – Equipment dealers operate as franchises requiring the manufacturer’s approval for any change in the designated franchisee. The owner’s son grew up in the business. Over time, he was added to the franchise agreement as a co-owner and became the general manager. The father reduced his active business time while continuing to draw a salary and bonuses as a corporate officer. Additional retirement income would be provided through a formal deferred compensation plan.
While neither of these approaches resolved the ultimate
ownership transition, they were very effective “next steps” in the monetization
process.
[1] This is the fifth article in a series regarding ways to “monetize your equity.”
[2] This article is intended for informational purposes only and does not represent tax, accounting or other professional advice. Please consult your own professional advisors before taking action based on the information presented herein.
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