Harvesting Value From Entrepreneurial Success

This article discusses ways for entrepreneurs to gain liquidity from their businesses, either with or without a sale of the business. In today's financial arena there is a wide variety of methods and financing vehicles that can enable private companies to harvest liquidity to meet their own needs for growth, the consumption requirements of their founders, or the challenges of tax and estate planning. For companies with limited growth opportunities but fairly stable cash flows, the alternatives range from orderly liquidation to highly leveraged transfers of ownership such as those accomplished by leveraged buyouts, ESOPs, and mezzanine finance. For companies with abundant growth opportunities, value is typically maximized through sale to a strategic buyer or an initial public offering of equity (although a new hybrid called the “private IPO” has recently emerged that looks more like an LBO than an IPO). In order to achieve its full potential, a company should be financed in such a way that enables it to continue through its natural business lifecycle, regardless of whether that matches the human lifecycle of its founder. So long as leadership succession can be arranged, the business lifecycle can determine the course of the company. Indeed, selling the business is the value‐maximizing solution only if there is a strategic buyer willing to pay a premium above the business's stand‐alone value, or if the founder wants to withdraw from the business and has no preferred successor. Moreover, for the vast majority of companies, going public is not the recommended means for “cashing out.” An IPO is likely to be a value‐maximizing (and emotionally satisfying) experience only for (1) companies with valuable growth prospects that require funding for investment and (2) owner‐entrepreneurs who are willing to subject themselves to the scrutiny and fluctuations of the market.