Be Sure to Do the Math

In simplest terms, when you are considering the future of your business, you have two options-keep or sell. However, within each of these two options there are several ways to approach the transition, each of which requires consideration of a number of additional factors.

  • Factors to Keep: You can gift or sell to family, sell to management, partners or to employees via an Employee Stock Ownership Plan (ESOP).
  • Factors to Sell:  You can sell to a financial buyer, a private equity group, a strategic buyer, or to the general public via an initial public offering.

Each option has pros, cons and math that needs to be understood in order to determine which option best matches your business, personal and financial objectives. The math refers to the impact it will have on your financial picture, including your personal balance sheet (assets and liabilities), cash flow, liquidity, risk profile and asset protection.

The Difference between Cash and Cash Flow

One of the challenges of the keep-sell decision is determining the difference between cash and cash flow. While you may be able to sell the business for a fair market value, maybe for even close to an all-cash offer, you need to convert that liquidity into cash flow. Given the potentially low yield provided by interest on bonds or dividends or stock in today’s capital markets, it is not surprising that after you run the math you may learn that, after tax, you may only generate 15% to 25% of the cash flow you had before you sold the business.

The comparison between an all illiquid vs. a liquid portfolio is an “apples to oranges” comparison in terms of risk, safety, liquidity, lifestyle and flexibility. What is most important is to take an honest financial snapshot of each option on a before and after basis, before you make the business transition decision.

Where to Find Insight

Your PNC corporate and wealth team has the experience and financial modeling tools to help you “fast forward” down the road of life under these buy/sell scenarios. Take the guesswork out of the equation and make sure your team understands your objectives. They can outline your options so you can gain control of perhaps the most important financial decision you will make during your lifetime.

Please contact your PNC representative to further explore business succession planning.