Equity release allows existing shareholders to extract some of the value within the business without losing controlling interest
Having guided an organisation to profitability and a strong cash flow position, existing shareholders may decide to extract some of the value within the business. This could be done for a variety of reasons, including:
- a wish by one or more shareholders to retire not shared by all
- to reduce shareholders’ exposure to risk and "cash-in" some of the company value
- the enjoyment of financial reward following years of hard work
Staying in control of the company
Remaining in overall control is a key issue for existing shareholders in these situations.
A solution to this is often found when a private equity company purchases a minority stake in the company. Existing shareholders retain the majority vote, and stay in control when strategic decisions are made or bank borrowing - cashflow or asset based lending to enable a lump sum withdrawal.
Reducing exposure to risk
Equity release may be sought by shareholders trying to reduce their exposure to risk. It is not only the injection of cash that is important in this instance, however. Somefunders will bring with them complementary skills and ideas to add value to the business, and of course it is imperative that the funding can be serviced without compromising plans for future business growth.
In fact, should there be any doubt concerning a company’s ability to service a release of equity, or of the remaining shareholders’ capability or motivation to maintain the company’s excellent position, it is unlikely that suitable providers will be interested in placing an investment.
If a shareholder working in the business is approaching retirement and wants access to the monetary value they have been instrumental in building up, equity release is an obvious solution. This type of funding may also provide an incentive to the next generation if the business is family-run.