Guest article by Scott Ford, founder and CEO of Cornerstone Wealth Management Group
Is your business your largest asset? A 2014 CNBC study revealed that most small business owners have 70% of their wealth invested in their businesses, with 20% of owners having over 80% tied up in their firm. What if you could take considerable cash from your business to live your life the way you want to now, instead of waiting for retirement?
An E-Recap transaction may allow you to take significant resources without crippling your business or giving up management control. The process includes a third party investor providing cash to help facilitate an ownership restructuring. There are costs and risks associated with the transaction, which should be considered along with the benefits to the firm and its owners.
In my new book, The Sustainable Edge: Fifteen Minutes a Week to a Richer Entrepreneurial Life, Ron Carson and I study what it means for entrepreneurs to find true fulfillment. We’ve witnessed so many “successful” business leaders towards the end of their careers feeling empty and unfulfilled. Finding real balance means having the resources and time to live life on your terms throughout your career before your family and health suffer.
By cashing out of your business, you can take some chips off the table, diversify your family’s wealth, and find the time to pursue what is most important to you. This process doesn’t require selling your firm or compromising the future of your business and employees. It’s possible to step away from your firm and actually improve its long-term value.
Why Cash Out Now?
Many small business owners have achieved financial certainty, by earning enough to meet their needs or even financial independence. But a large majority are unable to achieve true financial freedom without taking assets from their businesses. Financial freedom allows entrepreneurs to find balance in their lives, with their families, and to contribute to the causes they care about most.
What’s more, cashing out of your business allows you to lower your overall financial risk by diversifying your wealth1. By removing assets from your business, you potentially lower your exposure to events such as economic downturns, industry changes, lawsuits, and tax changes. The proceeds can potentially compound free of business risk, however, investing does involve risk including loss of principal.
Many business owners who choose to cash out of their businesses do so because they are nearing retirement age and their appetite for risk has decreased. Often, they aim to spend less time running their firm and more time enjoying their families and passions. While many do not wish to fully retire, they seek to transfer management to younger partners and step aside from day-to-day operations.
Finding Liquidity for the Exit of One Partner
The E-Recap transaction can be an effective solution for a firm with one partner who wants to exit with cash and another who wants to continue running the firm. By introducing a new source of capital, the exiting owner can sell his share of the business, while allowing the remaining owner to continue running the firm without disruption.
Maintaining Operational Control and Ownership
The E-Recap program is designed to allow business owners to get cash out of their businesses while keeping majority ownership and operational control. Business owners who seek liquidity but also want to retain ownership of their firm may benefit from this transaction.
Who Should Consider an E-Recap Transaction?
Business owners who are considering selling their firm within five years should understand the unique benefits of an E-Recap, including the ability to:
- Take significant cash out of a business
- Maintain operational and ownership control
- Step away from day-to-day operations
- Accelerate growth
As entrepreneurs, we often lose sight of what true success means for us. In The Sustainable Edge, we review how being busy with balance can help you find real fulfillment. Being busy with balance allows us to find sustainable growth in both our business and personal endeavors. Having the resources to be truly financially free and the time to put towards our families and passions can unlock lasting satisfaction.
1 There is no guarantee that diversification will enhance overall returns or outperform a non-diversified investment. Diversification does not protect against market risk.
About Scott Ford
Scott Ford, founder and CEO of Cornerstone Wealth Management Group and a Carson Institutional partner, serves on the investment committee as the technical strategist. He is a registered principal at LPL Financial and is a registered financial consultant. Scott is ranked in the top 1 percent of all LPL registered financial advisors based on annual production.
He was recognized as one of the 20 Rising Stars of Wealth Management by Private Asset Management Magazine in 2008. Scott is the author of two books: Financial Jiu-Jitsu: A Fighter’s Guide to Conquering Your Finances and The Widow’s Wealth Map: Six Steps to Beginning Again.