In corporate finance, a liquidity event converts the ownership equity held in a company, either in whole or in part, into cash with the funds to be distributed on a pro-rated basis amongst the ownership stakeholders.
A liquidity event can take various forms, with some of the more common being; a merger, a purchase or sale of a corporation, or an initial public offering (IPO) of the company’s securities on a stock market or exchange.
A merger is a deal to unite two existing companies into one new company. Most mergers unite two existing companies into one newly named company. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share.
In the purchase or sale of a company, where all the shares are being sold, the entire business passes to the new owners, including things such as the name of the business and its book of accounts. In a share sale, the liabilities are sold along with the rest of the business; in an asset sale, only assets are sold, meaning that the original owner may still be responsible for the business’s liabilities.
An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are typically issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately-owned companies looking to market their securities on a publicly traded exchange. Once a company is public it has liquidity of it securities for its investors {see post on Equifaira blog, “Public and Private Investing – What should you know“}.
Another liquidity event for shareholders may be in the form of an offer from the company to buy back the stock or other securities of the company, as owned by its shareholders. This type of transaction is known as a redemption plan. The company may have a standing offer to buy-back securities. Alternately, it might choose to issue a tender offer, which invites shareholders to sell back their shares at a set price. In either case, the buyback is voluntary and shareholders can choose to participate or not. Since buybacks reduce the number of trading shares, they often have an outcome to raise the share price of the issued stock.
Still another type of liquidity for shareholders can be a monthly, quarterly or annual distribution of funds available within a company. This distribution may be in the form of revenue or profit sharing, interest payments or dividends.
For privately held companies, a well-planned liquidity event is often the goal of the leadership, turning otherwise mostly illiquid equity into cash or other marketable securities.
