We come across many family businesses that are in the midst of succession planning to allow the older generation to retire. With the looming tax increases and increased cost and complexity of doing business, the right solution for many of these is to sell the business. However, many family businesses would rather remain independent, but nevertheless they end up selling as they are not aware of alternative methods to provide liquidity to retiring shareholders and maintain control and independence of their business. Here are three alternatives that family business can explore to accomplish these goals.
1) Structure an internal family buyout.
The elder generation can sell the business to the younger generation, either financed by a bank or by seller financing where the elder generation takes back a note. There can be substantial tax advantages to this transaction if structured correctly and in concert with proper estate planning.
2) Use mezzanine debt to provide share acquisition capital.
What if a bank will not provide senior debt financing, and the elder generation requires cash liquidity to diversify their assets? The answer could be in the mezzanine debt markets to acquire the elder generation’s shares for cash, while retaining full control of the business, increasing the younger generation’s ownership and giving up minimal, or even no equity.
3) Partner with a private equity firm on a minority recapitalization basis.
With over $485 billion of liquid uninvested private equity capital in over 2000 funds across the US, many private companies can now run a competitive process for a minority recapitalization retaining control of the business, often with low or no minority discount.
We believe the legacy of family business is alive and strong, and we are driven to help foster a continued ability for family companies in Oregon and the Pacific Northwest to thrive in their independence.
By Christian Schiller, Managing Director, Cascadia Capital
About Cascadia Capital
Cascadia Capital is a Seattle-based investment bank which advises middle market and family companies on M&A, growth funding and equity and debt liquidity transactions. Cascadia has remained very active having closed 12 transactions thus far in 2010.