Company divesting is an important consideration for entrepreneurs. It is a fairly easy concept to understand, yet very difficult in practice. That said, there are ways you can go about this without ruining your company.
What is Company Divesting?
Company divesting is just a fancy way of saying you shouldn’t have all your eggs in one basket. Most entrepreneurs own 100% of their company, making it their largest single asset. Unfortunately, that’s not a great strategy for long-term financial security. Fortunately, we have some tips for you!
The most common way to divest from your company is to sell some or all of it. The dream scenario is to hold an Initial Public Offering (IPO) for your company. However, that is also a very uncommon scenario. In order to make an IPO feasible, your company needs to be worth millions of dollars. Additionally, you’d need to be prepared to spend at least $50,000 to make this happen. With no guarantee this will benefit you, IPOs are a lesser option.
Fortunately, there are investors out there looking for mid-sized successful companies to invest in. If you know where to look, this could be a great option for you. When you sell a portion of your company, you need to be sure you keep enough control to make decisions. This can be done in a multitude of ways. The easiest way to keep control is to keep at least 51% of your company. You can also sell just “preferred shares” or other ownership interests that do not allow the investors to vote. For example, you can sell off 80% of your company with the restriction that the investor can only vote if you’re no longer the owner of the other 20%.
No matter how you utilize the investor, it is important to remember you should reinvest that money into other assets or investments. The goal is to save for your retirement. I don’t have a good rule of thumb for how much of your retirement is made up of your business. However, keep in mind that if anything happens that prevents you from working, you could lose your entire retirement very quickly if your retirement fund is your business.
One of my favorite ways to divest from your company is to slowly sell it to your heirs or family over time. If the idea is to have your family inherit your company anyway, you can speed up that process, provide succession planning, and diversify your retirement savings all at the same time. Of course, this is contingent on your family having the money to purchase a portion of your company. Additionally, you may come across tax issues with this strategy. All strategies come with tax consequences, but family is always weird. The sale of your company needs to be at or around market value. Otherwise, someone will either have received a gift or capital gains on the transaction. You can help alleviate this tax risk by working with a CPA or accountant in that field.
Similar to a family-owned company, you can also establish an employee-owned company. This one comes with its own set of risks and hurdles. Unlike investors or family, when you sell to employees, you are dealing with the deferred compensation laws. Done right, however, you can create a really great atmosphere and accomplish your own objectives at the same time. You can also run an employee-owned and family-owned plan simultaneously. Just be sure to have a stock plan or similar device setup ahead of time. The stock plan defines what stocks or ownership percent go to whom and when. It is designed to provide transparency and a guide to ensure no one is diluted unfairly.
Company Divesting Through Loans
My least favorite strategy for company divesting is loans. The idea behind this strategy is to take out business loans to pay yourself. You still have every intention of paying them back with the business, but if the business fails, you’re not personally liable for their repayment. The biggest problem with this strategy is that it increases the chances of failure. Once you take the first loan, you’re paying the interest going forward. You’re essentially taking the future profits out of your company now. This may, however, be an option for some people. If you have to guarantee the loans personally, this option does not work.
No matter which strategy you choose, you can reinforce them by limiting your own reinvestment. Anytime you feel like you need to put more money into the company, you need to think about how that will affect your personal long-term financial security. When you reinvest in your company, you’re putting more eggs into the same basket. Could that money be better off invested in some other asset or investment?
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