Cashing Out Your Hidden Business Assets

Your successful health food store is more than just your most valuable capital asset—it represents the realization of a dream. Unfortunately, too many exiting entrepreneurs (as well as their legal, financial and business advisors) leave too much cash behind because they fail to recognize the enormous value hidden within one of their most overlooked and underutilized business assets.

Due to the aging of the baby boomers, we are at the precipice of the largest business transition in history, with millions of entrepreneurs seeking to monetize business equity. With so many companies up for sale at the same time, the increasing competition to sell demands innovative asset leveraging strategies to capture optimum value, as well as create more cash with which to expedite a sale.

Hidden Business Assets

Throughout the business cycle, companies purchase numerous business life insurance policies for risk management, employee benefit and investment purposes. Traditionally considered inflexible assets with little liquidity, they have long been viewed as necessary yet unrecoverable expenses.

When a company is up for sale, some of these life contracts may become obsolete because the reasons for their purchase are no longer relevant, and after a company is sold, additional business life policies may outlive their usefulness.

Historically, exiting entrepreneurs faced limited disposition options when their changing needs rendered their life policies unnecessary: allowing the policy to lapse, thereby forfeiting the value of all premiums paid or surrendering the policy to the original insurer for its cash surrender value, an amount that doesn’t reflect its true value.

Today, an innovative asset optimization technique, a life settlement (the sale of a life insurance policy to an institutional investor for a cash payment that is greater than the policy’s cash surrender value), can convert the hidden value in no longer needed qualified business life insurance contracts into significant immediate cash. This windfall can be used for any purpose, including facilitating the sale of your company for the desired price and on favorable terms.

An Entrepreneurial Tale

A 69-year-old principal of a successful independent health food company owned a $1 million key-person term policy (no cash surrender value). Seeking to sell his firm, this entrepreneur received no offers that he felt were adequate for achieving his retirement and legacy goals. Unfortunately, his legal, financial and business advisors were unaware of the enormous value hidden within this term policy.

Instead of lapsing the policy and receiving no return on the premiums he had paid for many years, this owner sold his policy to institutional investors and received an unexpected cash windfall of $200,000.

By coordinating the sale of their company with the sale of their policies, the owners were able to sell their company quickly at a reduced all-cash price because the life settlement proceeds provided the money they needed to fill the gap between their original selling price and the offers from buyers.

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