By David Worrell
Do you have investors you wish you had never taken on? One way to take back control of your company from investors is to buy back their stock. In this guest post, small business finance expert David Worrell shares some advice on how to know when it’s time to buy back stock—and how to make the process work.
One of my clients recently told me he hated going to work. He’s an entrepreneur, but over the years he has given stock in his business to investors, partners and key employees that he feels as if he’s lost control.
My client wanted to buy back the stock he had sold to investors and partners so he could take back control of his company. That might sound tricky, but it doesn’t have to be. And in the current economy, now could be the perfect time for a stock buyback.
Why Now?
Every investor wants an “exit.” At some point – whether now or later – they want to cash out and go on to the next big thing.
These days, cashing out is an attractive offer. As stocks and real estate continue to languish, even the wealthiest of investors are looking for ways to shore up their cash position. Now could be the perfect time to offer your investors cash for their equity.
Further, the lingering recession means that investors have lower expectations for the value of their stock. Even if your company is doing well (and particularly if it is not!), the price you can offer investors might be lower than you think. Perhaps it is even lower than their original investment.
It’s just good business to buy low and sell high – and the price of your stock has likely never been lower. Can you buy it back now and make it worth more?
How to Make a Stock Buyback Work
Make no mistake – a stock buyback can be expensive and painful in the short term. Unless you are independently wealthy, finding the cash to pay to stockholders probably means one of two things: taking out a sizeable loan from a bank, or pledging current cash and future profits from the business. Either way, you are looking at squeezing your cash flow and profitability in the near future. Start planning now for a successful buyback:
(1) Tighten your belt.
Start to cut out discretionary spending now. You’ll want to prioritize savings in the short term. See how efficiently you can run the business while you are paying back investors.
(2) Visit the bank.
What you cannot save, you will have to borrow. Talk with your banker today about how much you can borrow, repayment terms and other details.
(3) Then visit 3 more banks.
In extreme cases, a stock buyback can quickly turn into a complete recapitalization – a restructuring of debt and equity to make the company more capital efficient. You may need the help of larger banks, mezzanine lenders and perhaps even new equity investors. Line up as many supporting players as you can.
(4) Get objective advice.
Stock buybacks should be a celebration, but if mishandled they can become a nightmare. It’s always best to have a third party – an investment banker, valuation expert or general finance consultant is best – with whom you can discuss details and plan strategy.
(5) Know the code.
Together you and your advisor should review your shareholder agreements and other prior investment documents so you know your starting position. Be sure you honor all of these prior agreements with the shareholders.
(6) Start the conversation.
Eventually this will become a negotiation. For now, start the conversation on a positive, friendly note. Thank investors for helping you grow the company. Ask them about their long term investment goals. Play “what if” with them – pose questions like “what if I could make you an offer for your shares?” Let them open up and tell you what’s important to them.
When you have bankers willing to back you, a finance advisor to guide you, and a fair understanding of what your investors want (or deserve), you’re almost home. Rely on your finance consultant to keep things moving forward (and to keep everyone’s emotions in check).
Lastly, one precaution: Don’t let your eagerness to re-take control cause you to pay more than the stock is worth. This transaction will fundamentally change the financials of the company, and a bad deal could sink the whole ship.
Remember, when this transaction is done, the business will be back in your hands. You won’t be beholden to shareholders, but neither will you be able to rely on them in a jam. So be sure you emerge from this with a stronger company…because for better or worse, it’s all yours!
David Worrell is a serial entrepreneur who now advises entrepreneurs on finance and strategy issues. He can help you take your business to the next level (or buy back stock). You can contact David at www.RockSolidFinance.com.
Image by Flickr user Alan O’Rourke (Creative Commons)
