Cash out (accounting)
Cash out (accounting)Acct. Term Paper
"Cash Out"
In an October 1998 issue of "Fortune Magazine" in the finance section, an article entitled "Cash Out on Your Own Terms" speaks about a relatively old concept refined for a new market. In the centuries past, wealthy landowners would allow working farmers to live and work on their land and tend the crops and cattle for a portion of the goods and maybe a portion of the profit. The farmer was happy because he didn't have enough money to buy his own land yet he could still do what he loved and support his family. The wealthy landowner was happy because he had his land working for him and was getting fairly cheap labor and a good return on his goods.
Today the same concept applies to owners of family businesses. When a CEO of a company either needs liquidity or has no relative or partner to pass the ownership to is the main time that owners think about where their business might be going. Many owners of a family business don’t do estate planning or strategy until it’s too late. Even when the owner tries to plan for the inevitable, he has minority shareholders or kids who don’t want to run the business. Every option for the owner has a downside. Selling usually means the owner must give up control. Going public often creates an orphan stock. Employee-stock-ownership plans can burden the CEO with "onerous regulatory-compliance issues," and leveraged recaps can load the firm with debt. Company owners come to firms such as Heritage Partners because they want to cash out but at the same time keep management control of their company and the Heritage system allows them to do that and help them grow the business too.
Investing in family businesses and then letting owners keep control of their companies after the sale is a novel concept but it’s risky. Heritage Partners plan gives cash to owners which usually amounts to about 85% of what their companies are worth, providing new money for growth while leaving them 51% of their firm’s stock. Since introducing the plan in 1988, Heritage Partners has invested $250 million in 37 companies whose combined revenues exceed $2 billion. While many are companies with market caps of $50 million, sixteen are small businesses with fewer than 100 employees. Their goal is to stay very involved in a company for about five years, helping it reach its maximum growth potential, then sell it, possibly back to the original owners, or take it public.
In order to make their company attractive to buyers, owners should begin to develop and put in place a real management team. The CEO should be a dynamic, visionary leader. The chief financial officer should be able to offer "instant reporting of data and be a strategic thinker," and should have a well-known CPA firm begin auditing their financial statements if...
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