Liquidity Solutions for Family-Owned Businesses to Generate More Growth and Flexibility

January 26, 2024 by Interchange Capital Partners

By Brian Baum, CEPA®, CFP®

Liquidity is not something many family-owned business leaders think about until they have to. When that time comes, finding liquidity solutions can be an all-consuming fixation, and depending on the state of the business, some valuable options may be unavailable.

Whether facing cash flow issues, attempting to expand, restructure, or just trying to compete in the market, family-owned businesses need to know where their liquidity solutions can come from—and whether they’ll be enough in advance.

The situation is similar to a big corporation opening a new credit line or seeking an infusion of capital from its bank, except those companies usually have greater liquidity solutions that a family business may not. Some family-owned companies don’t have a lot of cash in their coffers. As such, their leaders often believe they must sell shares or cede control to generate liquidity.

The decision-makers of family-owned businesses have to consider their shareholders’ perspectives as well. Shareholders typically receive dividends from the company. But if the business decides to stop paying dividends for a time, the shareholders will want to seek liquidity solutions. A family-owned business must, therefore, free up as much cash as possible before it resorts to ending dividend payments to shareholders.

Types of Liquidity Solutions for Family Businesses

Some liquidity solutions available to owners of family businesses include:

• Regular and special, one-off dividends

• Selling off shares to other shareholders or the company

• Selling parts of the business

• Taking on debt to pay special dividends through bank financing or equity arrangements (debt recap)

• Leveraging employee stock ownership plans (ESOPS)

• Insurance proceeds from passing shareholders

• Initial public offerings, depending on the size of the business

When it comes to liquidity solutions advance planning is essential and more options are better.

Liquidity Solutions and Shareholder Expectations

The object of most businesses is to grow. From time to time, that involves accessing capital and identifying liquidity solutions. Considering their potentially limited cash reserves, family-owned businesses need to anticipate their future financial requirements and the most likely sources of additional capital.

However, they also have shareholders to consider. As they seek liquidity solutions, they’re also well-advised to find some for their shareholders if dividends can’t be maintained.

Shareholders will want options like selling their equity stakes or leveraging their holdings as loan collateral. All this makes it important for family-owned businesses to define the liquidity solutions available to their shareholders in advance. 

Challenges to Liquidity Solutions

Your business may not have access to liquid cash payouts precisely when you need them. Consequently, it’s important to know where you can get that liquidity.

One common solution is to enact an annual redemption policy, in which the business buys back shares from holders who want to unload them and sells them to holders who want to get them. This system can work when deployed sparingly, but it isn’t a permanent or sustainable solution. It’s better to enact this policy when things are good, in preparation for leaner periods.

Another option to consider is receiving insurance proceeds from shareholders who have passed away. Let’s say a shareholder dies. That stock doesn’t go into a trust—it’s essentially in permanent escrow with the survivors, creating potential risks.

One solution is to purchase a life insurance policy on that shareholder. Among other things, it will serve as a balance sheet asset. You may be able to refinance the life insurance, cash it out, and find alternative assets to cover future premium payments.

Finally, it may be necessary at some point to bring in capital from sources who aren’t family or current shareholders as a liquidity solution.

This may require establishing a more professional operation and reporting structure for your business. It will also call for you to devote more attention to compliance issues to appeal to professional investors. They may ask for more control over their investment, so be prepared.

Get Help Exploring Liquidity Solutions

Interchange Capital Partners provides business consulting, family office, and transition services and can help you find workable liquidity solutions for your family-owned business in advance.

If you’re looking for a personal, trusting partnership, please take advantage of our Second Opinion Service. Email us at team@interchangecp.com or call our office at 412-307-4230 to schedule an introductory appointment.

About Brian

Brian Baum is the CEO & President of Interchange Capital Partners, where he leads the development of innovative strategies tailored to the unique needs of private and multi-generational companies. Early in his career, Brian conducted over 1,000 interviews with CEOs, Presidents, and Chairmen of privately held companies, uncovering a critical insight: the larger the company, the more likely the owners were to struggle with complex family, business, and ownership dynamics. Even more striking was the realization that many of these business leaders were unaware of these complexities and the sophisticated level of advice needed to effectively navigate them.

Armed with this understanding, Brian has been instrumental in reshaping Interchange’s focus, aligning its services with the lifecycle of generational transitions. His approach provides owners with expert guidance through the critical phases before, during, and after an ownership change, addressing both the immediate needs and the long-term vision of the business and family. Under Brian’s leadership, Interchange has become a leading resource for business owners seeking to solve intricate challenges and create lasting value.

Brian's vision extends beyond traditional financial advice; he positions Interchange as a family business advisory firm, recognizing the interconnectedness of family and business in creating enduring success. His leadership is not only about working to optimize financial outcomes but also about enhancing the overall well-being of the families he serves. Interchange’s work involves coordinating all aspects of a family's financial, business, and ownership strategies, akin to managing an outsourced family office, ensuring that no aspect is overlooked.

Brian’s educational background includes a Bachelor of Arts from Penn State University, where he majored in Psychology and minored in Business. He is also a Certified Exit Planning Advisor (CEPA) and a CERTIFIED FINANCIAL PLANNER™ (CFP®).

Outside of work, Brian enjoys spending quality time with his wife, Natalie, and their two daughters, Quinn and Blair. He is an avid golfer and enjoys the occasional scotch and cigar. To learn more about Brian, connect with him on LinkedIn.

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