In the summer of 1980, while still in high school, Joe Greco convinced 12 companies to let him print their billing documents. He bought a small printing press, and at night, out of his parent’s home, he diligently and meticulously churned out the business forms. It was a humble, hopeful beginning, as entrepreneurial endeavors often are. By 2002, Greco’s firm, PSC Info Group, based in Oaks, Pa., had become a global provider of document and information management services and business communications, with revenues of $25 million.
Private equity firms took notice as PSC grew, and they began calling on a regular basis to offer Greco their expertise in exchange for an equity stake in his business. Greco, however, had poured his heart and soul into his creation, and the idea of giving up any part of the company held no appeal. “I was enjoying my success, and my goal was to just keep growing,” he recalls. “I wasn’t thinking about [equity partners]. I just wanted to build the business until it was a cash cow, and sometime—maybe—take it public.”
But by 2002, several factors pushed Greco’s thinking in a new direction. One was the sheer concentration and illiquidity of his wealth. “I always thought of my stake as one large stock position, and running the business was like managing an investment portfolio of one stock. As an entrepreneur, some days you come home feeling great, and others you come home feeling scared.” The situation also began to hamper his business: By 2000, PSC was competing for contracts from large public companies, and his sole ownership of his company made some of them uneasy.
Greco was at a crossroads. He certainly did not want to sell his business outright and lose control, but he needed to diversify his own financial position and take his business to the next level. For many entrepreneurs, this trade-off of control versus liquidity is both familiar and vexing. It becomes even more challenging when the company in question is a closely held family business, perhaps one several decades old involving multiple generations.
Thanks to the Jobs Growth Tax Relief Reconciliation Act of 2003, business owners who sell equity stakes in their companies now benefit from one of the lowest capital gains rates in decades. To put the current tax environment in perspective, the 15 percent tax on dividends and long-term capital gains is the lowest levy on capital gains since 1933 and the lowest on dividends since 1916. While this current rate will be in effect until 2008, the rising tide of budgetary red ink in Washington leads some to question if it will last. |
Entrepreneurs who want to get cash out of their business without giving it up have a number of options that can be adapted to suit a wide array of preferences and circumstances. At the blunt end of the stick is the straightforward bank loan. But depending on the owner’s preferences, he or she can employ other, more complex tactics such as selling part of the business to employees through an employee stock ownership plan (ESOP), or selling shares to a trust for family members. For those who plan to cede control at some undetermined point in the future, taking on equity partners in a deal structured to accommodate an eventual, rather than immediate, exit can offer the biggest payout.
The liquidity strategy must conform to the owner’s vision of a personal and professional future. Many find that, ultimately, they will sell the company either in whole or part, so giving careful thought to one’s preferences and goals is the first step. “You need to use a decision tree,” says Holly Isdale, managing director in the wealth advisory team at Lehman Brothers in New York. “Do you want to grow the business, or just take out equity for personal use? Do you think you will eventually sell the business, or give it to your children?”
For those who want to keep their business closely held, the most straightforward option is to swap equity for debt—that is, have the company borrow money and pay the proceeds to the owner as a special dividend. Bankers typically refer to this as a leveraged recapitalization because the owner is changing the capital structure of the company by boosting the amount of debt. These transactions are attractive when interest rates are relatively low, as they are now. Also, since banks typically have no desire to run a business, the owner is generally free to operate the company as he or she sees fit. However, bank loan covenants do typically restrict an owner’s purview. For example, they may bar the company from borrowing more, or prohibit it from undertaking large acquisitions or asset sales within a given period.
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