Many business owners want to eventually cash out some or all the equity in their company. This event is often a lynchpin of their financial plan.
The concept of a liquidity event may seem daunting and confusing. It’s important to understand the different types of liquidity events and how they can impact your business. Here’s a quick breakdown of the most common liquidity events:
Venture Capital Invetsment: Venture capital (VC) firms provide funding to startups and small businesses in exchange for equity. This type of liquidity event can be a great way to get the financial support you need to grow your business.
Private Equity Investment: Like VC money, private equity firms invest in businesses in exchange for ownership. This type of liquidity event is typically reserved for more established businesses with a proven track record of success.
Internal Sale: An internal sale is when a business is sold to its employees, rather than an external party. This type of liquidity event can be a great way to keep the business in the hands of those who know it best and are invested in its success. The Secure Act 2.0 expands one of the ways to do this, an employee stock ownership plan (ESOP), to S corporations.
External Sale: An external sale is when a business is sold to an outside party, such as another company or individual. This type of liquidity event can be a good option for businesses looking to cash in on their hard work and move on to other ventures.
Going Public: Going public, also known as an initial public offering (IPO), is when a private company becomes publicly traded. This type of liquidity event can be a great way to raise capital and increase the company’s valuation. This is generally an option for the largest of companies. May we all get there!
As a business owner, it’s important to be prepared for a liquidity event, no matter which type it may be.
This means keeping your financials in order, having a solid business plan in place, and being able to clearly articulate the value of your business to potential investors.
Working with a team of advisors, including your financial advisor, accountant, and attorneys, can be helpful in navigating the process and ensuring that your business is ready for a liquidity event.
Liquidity events are a common occurrence in the business world and can be a great way to grow and expand your business and help you cash in some of your hard-earned equity.
By understanding the different types of liquidity events and being prepared, you can ensure that you and your business are ready for whatever comes its way.