Unlock Liquidity for Your Family Business Without Compromising Operations

By Brian Baum, CEPA®, CFP®

For successful family-held businesses, it’s not unusual to accumulate a highly concentrated position in that business. But for a number of reasons, it might make sense to lower that concentration. Perhaps you want to diversify your investments, prepare and implement a succession plan, or something else entirely. Regardless of the reason, the key challenge will be unlocking your liquidity in what is likely a highly illiquid business. 

In this article, we’ll discuss some of the key problems with traditional liquidity, and how our strategy can help not only create more cash flow and more diversification, but also make a future succession easier to navigate.

The Problems With Traditional Liquidity

Two traditional ways of obtaining cash flow are to sell a portion of the business or take out a loan. Both options unfortunately can negatively impact your family business. 

Selling the business means relinquishing ownership and control over the company, which may go against the family’s values or long-term aspirations. Additionally, if the family has poured significant time, effort, and resources into building the business, selling it may not result in fair value or an appropriate return on investment.

Taking out a traditional loan, on the other hand, can force businesses into unfavorable debt or interest expenses that might limit the company’s free cash flow and investment opportunities. Banks also may have unfavorable repayment schedules, which also limits cash-flow opportunities. 

However, with our clients, there’s a different strategy we employ that allows these businesses to unlock liquidity without sacrificing their core business. By incorporating our partnership with an innovative commercial finance company, UFT Commercial Finance, our clients can get the access to liquidity they need for purposes of investment on favorable terms while still retaining all the benefits of their ownership. Let’s discuss how it works.

A Different Way to Unlock Liquidity

Our clients with privately held businesses often have highly concentrated positions in their companies. Some of them are even considering going public in a few years, but they want to start diversifying their position sooner than that. Others may not be planning to go public, but still want more liquidity and diversification without the hassle of the methods mentioned above.  

At Interchange Capital Partners we evaluate the business balance sheet and assist our clients in obtaining a standby letter of credit. This isn’t a line of credit. In the case of a line of credit, a financial institution lends money to an individual or business. In the case of a standby letter of credit, the financial institution provides a back-stop guarantee of payment on behalf of the individual or business. From there, the standby letter of credit is placed in trust in support of the client’s approved target investments, business ventures, or projects where it enhances the credit of those individual or pooled investments.  

Through its system, UFT Commercial Finance then allocates both capital to the client’s target investments and delivers a credit instrument known as an Enhancement CPC (1) to the client.  The Enhancement CPC carries with it both a flow-through of income generated from the underlying investments as well as a security interest in those investments. In this way, the direct obligation for repayment of the capital provided through UFT Commercial Finance’s system falls to the investments that received the capital, while the agreed current income generating or long-term wealth building investments underlying the Enhancement CPC flow to the client. The client now has successfully diversified its investments as well as potentially created more cash flow.

Since the capital provided to the end investments selected by the client has to be repaid, those investments need to be able to generate sufficient returns to offset the cost of capital to the target project or investment. That excess aggregated return is paid to the client through the Enhancement CPC it holds, creating more cash flow to improve portfolio returns that can be used as the client sees fit.

One Example of How This Strategy Can be Used

The strategy can be used in conjunction with permanent life insurance. The business balance sheet or specific balance sheet assets are used as collateral to obtain the standby letter of credit. Once the target investments are selected and approved by the commercial finance company for funding, the capital is allocated to the investments, the Enhancement CPC is issued to the client, and the income generated from those investments starts to flow through to the client. That income can then be used to fund the insurance policy premiums. 

In other words, the business is successfully taking a negative cash-flow item (paying for insurance premiums) and turning it into a positive cash-flow opportunity (returns on the Enhancement CPC-linked underlying investments) which will also increase the cash value of the policy over time. This system also has a healthy impact on the business balance sheet with only a contingent credit obligation being added (standby letter of credit) to liabilities and an on-balance sheet CUSIP’ed instrument (Enhancement CPC™) plus additional insurance assets with tangible cash value being added as assets.

For generational businesses, this strategy also offers a unique way to plan for the future. With a few customized variations in the strategy, it can provide liquidity for the business when large stakeholders pass away, a tax-efficient method for the movement of business ownership from one generation to another, a better way to sell all or a portion of the business to a desirable buyer, and enabling the purchase of much-needed insurance that may not have been possible due to the perceived cost of insurance premiums. The added help in succession planning with this approach, combined with the cash flow generated from the income producing private investments, offers a valuable liquidity option for closely held family businesses.

Do You Need More Cash Flow and More Liquidity?

If you’re looking for a way to access more liquidity, diversify your investments, and plan for the future growth of your business, Interchange Capital Partners would welcome the opportunity to discuss if this strategy can help you. To schedule an introductory appointment, you can email me at brian.baum@interchangecp.com or call our office at 412-307-4230.

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.

Interchange Capital Partners, LLC, (“INTERCHANGE CAPITAL PARTNERS”) is a registered investment adviser with the Securities and Exchange Commission providing investment advisory and financial planning services. Any reference to the terms “registered investment adviser” or “registered” does not imply that INTERCHANGE CAPITAL PARTNERS or any person associated with INTERCHANGE CAPITAL PARTNERS has achieved a certain level of skill or training. A copy of INTERCHANGE CAPITAL PARTNERS’s current written disclosure (ADV 2A Firm Brochure) discussing our advisory services and fees is available for your review upon request. INTERCHANGE CAPITAL PARTNERS, in addition to providing investment advisory and financial planning services, provides business consulting services. In connection with its business consulting services, INTERCHANGE CAPITAL PARTNERS does not provide tax or legal advice.

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