Cash Out (Accounting)

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Acct. Term Paper "Cash Out" In an October 1998 issue of "Fortune Magazine" in the finance section, an article entitled "Cash Out on Your Own Terms" speaks about a relatively old concept refined for a new market. In the centuries past, wealthy landowners would allow working farmers to live and work on their land and tend the crops and cattle for a portion of the goods and maybe a portion of the profit. The farmer was happy because he didn't have enough money to buy his own land yet he could still do what he loved and support his family. The wealthy landowner was happy because he had his land working for him and was getting fairly cheap labor and a good return on his goods.

Today the same concept applies to owners of family businesses. When a CEO of a company either needs liquidity or has no relative or partner to pass the ownership to is the main time that owners think about where their business might be going.

Many owners of a family business don't do estate planning or strategy until it's too late. Even when the owner tries to plan for the inevitable, he has minority shareholders or kids who don't want to run the business. Every option for the owner has a downside. Selling usually means the owner must give up control. Going public often creates an orphan stock. Employee-stock-ownership plans can burden the CEO with "onerous regulatory-compliance issues," and leveraged recaps can load the firm with debt. Company owners come to firms such as Heritage Partners because they want to cash out but at the same time keep management control of their company and the Heritage system allows them to do that and help them grow the business too.

Investing in family businesses and then letting owners keep control of their companies after the sale is a novel concept but it's risky. Heritage Partners plan gives cash to owners which usually amounts to about 85% of what their companies are worth, providing new money for growth while leaving them 51% of their firm's stock. Since introducing the plan in 1988, Heritage Partners has invested $250 million in 37 companies whose combined revenues exceed $2 billion. While many are companies with market caps of $50 million, sixteen are small businesses with fewer than 100 employees. Their goal is to stay very involved in a company for about five years, helping it reach its maximum growth potential, then sell it, possibly back to the original owners, or take it public.

In order to make their company attractive to buyers, owners should begin to develop and put in place a real management team. The CEO should be a dynamic, visionary leader. The chief financial officer should be able to offer "instant reporting of data and be a strategic thinker," and should have a well-known CPA firm begin auditing their financial statements if they haven't already. Small-businesses should beware of the investor who comes in at a huge price, because it's likely he will retrade the deal. "Does he intend to make money by building the value of the company through growth or financial engineering?" "Tremendously resist pressure from investment bankers to provide unattainable projections. When you tell people you're going to hit certain numbers, you'd better hit them. Nobody wins if you come in too aggressively." This is a prime example of conservatism in the real world. Investors are looking for unique companies in every area "from the educational toy market to a company that manufactures products for industrial cleaning just as long as the family really believes in their company, and they feel passionately about it." This system, in my opinion, is an outstanding philosophy of the business world in America. When a company like Heritage Partners can come in and save a potential death of a company from any certain situation, it becomes a win-win position. Unlike the old days with the wealthy landowner and the poor farmer, today the relationship between companies like Heritage and small-business owners can be a beneficial and fair one.

Many sole business owners are of the entrepreneurial background and may have even built their company from the ground up. These people have to be hard working people with the strength to go into the world and create something like a business and nurse it into success. When times go sour, weather it be financially or even emotionally, sometimes these owners can pull their company out of the dungeon and other times there is just nothing they can do. When times like these arise these hard working people would never want to see all their work leave their grasps, and that is when companies like Heritage Partners can be a saving grace to the companies life and even the owners life. When a company has been in a family for years it is the identity of that family and it portrays a sense of pride and when situations jump out where that identity and control could be jeopardized, the help of Heritage is an outstanding one. Just as this option is beneficial for the company owner it is, without a doubt, a marvelous opportunity for the larger business such as Heritage to buy out and be involved as long as they are fair and reasonable.

I had heard of this market idea before in companies like Venture Capital but it wasn't until I read this "Fortune" article that I grasped the whole concept. From what I had perceived before this market niche isn't looked highly upon by many people. Some small-businesses may think that these companies perform forceful buyouts and therefore big business destroys small-business. My reason for selecting this topic is because I now realize after researching this subject that it is because of market inventions like this one that our country is the land of opportunity.