Growing a business takes a lot of effort and time. And, one question that is always on the minds of entrepreneurs is how they can salvage some of the value that has been created. This situation is called cash out. That is, it happens when an entrepreneur decides to exit the project and recover part of the value of the company. But what is cash out in the company?
That is why it is so important to grow in the most efficient way. As an entrepreneur, no one will be able to share the value you see in the project. And while raising lots of money is all the rage right now, maintaining control over your business is never going to be out of fashion.
WHAT IS CASH OUT IN THE COMPANY? WHEN TO CASH OUT?
Your options as an entrepreneur to cash out will depend largely on the traction of your business and your data.
Some of the strategic options that can lead to a cash out may be something that is even contemplated in the pitch deck. But how can I make a cash out?
SALE OF ASSETS
A widely used alternative in small businesses is to simply sell the assets . This situation can occur when entrepreneurs get tired, throw in the towel or when they find themselves unable to continue.
This may include selling equipment, selling real estate or even intellectual property or contracts.
MAKING AN IPO
IPO stands for Initial Public Offering, i.e. an initial public offering. For a long time it was considered the traditional way to earn large amounts of money to perform this type of operations. However, it is also true that in recent years, examples of large technology startups that have gone public and lost a lot of money are causing more and more investors and founders to look for alternatives.
SELL THE COMPANY
Nowadays, the option that is gaining more and more ground is to have your company acquired by a larger company.
The reasons can be several: from it being part of the company’s growth strategy (like Facebook did with Instagram), or how another startup that is putting together different companies to make a larger acquisition. On these occasions, the entrepreneur may be retained to ensure a smooth transition and handover.
This process can be lengthy and involve extensive due diligence.
There are also other ways to sell the company, and this is to employees or the management team:
- MBO (Management Buy Out): We refer to an MBO as the sale of the company to the management team. This cash out option is usually used when the owner trusts the management team and they want to move the company forward. The main advantage of this method is that the owner does not have to look for a buyer and waste time. But, on the other hand, this makes the acquisition price usually lower than it could be in the market.
- ESOP (Employee Stock-Ownership Plan): Another option, as mentioned above, is to sell the company to its employees. This process can be complicated, but it has many advantages. Among them, the owner can stay with the company and make a good transition, as well as being a good long-term incentive as compensation for work performed and loyalty.
On this occasion, the price and valuation is established by an external company. Employees have ownership of the company while working within the company. But, this may involve some cons. First, the owner may not want a third party to determine the price of the company as it may be below market. In addition, the company must have sufficient cash to repurchase the shares of departing employees.
SALE TO THE SECONDARY MARKET
On this occasion, it consists of selling part of the property to new investors in a subsequent round at an agreed price. Many founders encourage new investors by offering a discount on their shares.
This option is very popular in Venture Capital, especially when dealing with Series B to Series D rounds.
On other occasions the entrepreneur has made a cash out but wants to reverse the process. They see that the company is taking a direction they hadn’t seen, and they want it back.
In order to do this, debt can be raised and the shares can be bought back, thus regaining ownership and control of the company.
Another option is to simply prioritize profits within the company, rather than exaggerated growth. This may allow for a salary increase or a bonus at the end of the year.
With a reasonable operation, many entrepreneurs are able to recoup their initial investment relatively easily. Also, with these, recapitalize the company, pay off debt, support those who started the project with you and continue to drive the company forward while maintaining control.
What is cash out in the company?
There are many options to make a cash out as an entrepreneur. The earlier the exit is planned, the more profitable and better prepared it will be.
Schedule a demo with our experts and see how we can help you with your project.