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Liquidity tough to pin down when time comes to cash in

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Fred began his entrepreneurial adventure 12 years ago, buying products sitting on shelves and pushing them through to buyers at huge discounts from the original retail prices. Fred was a liquidator. It was fitting that he should be asking me about "liquidity" at this point.

"Stan, it's time for me to exit this business," he began. "I need to figure out how to do that and make sure our employees are taken care of. But to set the stage, I'd like you to give me and my three top executives an overview of the different ways we could achieve liquidity."

"I can do that," I replied. "What do you all know about process so far?"

"Assume we know nothing," Fred responded, "because the last time we tried this a few years ago, we assumed we knew enough. And we didn't."

"What do you mean?" I asked.

"In 1999, during the IPO madness, we spent almost $2 million preparing to go public, just to have the rug pulled when the market for offerings dried up." While it's been five years, I could see the pain was still fresh. Fred continued: "We listened to the underwriters' story, got big eyes about what the dollars could be, and missed all the signals that told us to slow down or turn back."

I counted to myself the many times I'd heard this story, from companies that had tried to go public and failed, and those who did go public only to find their stock near worthless in a short period of time and the company no longer their own. Fred was not going to make the same mistake twice, and he had pulled his organization out of a near death dive. It was now generating over $150 million in revenues and making money.

So I recounted to Fred the different ways for an owner to "cash in." We talked about several avenues, such as employee stock ownership plans, leveraged buy-outs, asset sales, strategic buyers and even IPOs. I told Fred how I'd approach the discussion with his executives and we settled on a date. We completed the session and the company is now in the process of deciding how it'll make decisions.

I suggested the team first find out what it doesn't know, i.e., get a valuation of the company completed. While no two valuations come out the same, if the service provider has sufficient data points in the transaction base, this will at least give hard evidence of completed sales in a time period that is relevant. It's just like getting comparables for a home appraisal. It won't necessarily predict what you'll get, but it is the latest data available.

The next step is to determine what the "walk away" price is, net of all costs, taxes and commissions. Any offer or net result below this value is not acceptable. This "walk away" price can't be negotiated or reneged upon, once set. So it better be well considered.

The third step is to do the research. Find out what's going on in the industry, with competitors, with suppliers and with Wall Street -- because the public market affects the demand of private companies as well. Assess the economic indicators that affect the industry and therefore the business. This will give you a picture of the future value of the company, which will affect the current price you can get.

Do the research about service providers you'll need to support the path you choose: accounting, transaction support, legal and possibly business brokerages. Just remember that how these service providers get paid determines their viewpoints about what is a "good" and "bad" transaction or decision. The key is to not make assumptions or rely solely upon anecdotal evidence.

Now the company is ready to begin pursuing the liquidity strategy it has chosen, based upon the best possible outcome according to the owners' goals.

At this stage, the next item to cover is "Who do we tell, and what do we tell?"

Most companies need the support of internal management and key staff to complete the myriad action items necessary in pursuing a sale of a business. And most owners will rightly be concerned about the possible negative impact on employees. The diversion of attention that occurs in the process of pursuing a liquidity event can be destructive to the health of the business.

If you're contemplating the sale of your business, or some other liquidity strategy, understand that it will be the most significant event in your company's history, other than the day you took in your first dollar. It deserves careful study and preparation. There are many factors to take into account before you even begin action. And don't let the bright, shiny prospect of a big payday blind you to the potholes you'll encounter along the way.

Sewitch is managing director of consulting services, RSM McGladrey, a full-service, international consulting and financial services firm. He can be reached at stan.sewitch@sddt.com.

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