Cashing Out Can Be Tricky

Taking cash out of closely-held businesses can be a tricky thing for your clients to do. Some people want to go public and that can be an alternative–for the right kind of company, according to Scott Adelson, senior managing director and member of the board of directors at Houlihan Lokey Howard & Zukin, an investment bank based in Los Angeles. Speaking at the Financial Planning Association’s National Conference in San Diego, Adelson said that clients sometimes “wake up one morning and say, ‘I’ve been doing this too long, I’m tired, I see competitors at my heels.’ “

There are times when the best thing a client can do is to “maintain the status quo,” according to Adelson. Perhaps the company is not quite ready for sale, as in the case of Adelson’s client, the owner of a successful company. “He did everything himself, he couldn’t take a vacation, and had to take care of every problem.” The owner really wanted to spend time on his avocation–flying–something that had nothing whatsoever to do with his business. He had not hired management to institutionalize his firm, and instead of putting profits back into the company he had been taking them out to fund his flying. Potential buyers could either require him to stay on to manage the business, or discount the value of the transaction to account for hiring new management to run the business.

Adelson counseled the owner to stay on for a time, plowing profits back into the firm and hiring management who could stay with the firm when it was ultimately be sold–slightly later and at a higher multiple of earnings.