By: Patrick Ungashick
Business owners often think about exit as an all-or-nothing event. For example, “Should I sell my company?” is a more commonly asked question than “How much of my company should I sell?” Yet in many situations selling only some of your business can achieve many of your exit goals, while leaving you owning a portion (and perhaps even a controlling portion) of your business. Here’s how.
The Basics of Partial Company Sale
Selling less than 100% of your company to an outside buyer/investor is usually called a private recapitalization, or recap for short. Any amount can be sold, and private recaps occur where the buyer acquires anywhere from 10% to 90% of the target company. A critical question is whether the buyer acquires a controlling interest in the company, meaning, of course, more than 50% of the voting stock. However, buyers who acquire less than 50% will still negotiate into the deal-specific ownership rights, called supermajority rights, that give them a direct say in strategic issues such as whether or not the entire company is to be sold. Therefore, whether or not you sell more than 50% largely impacts who is in charge of the day-to-day operations of the company.
Potential buyers include wealthy individuals, private equity groups (PEGs), family offices, and sometimes other companies that see a strategic fit with your business. Buyers will often use a combination of equity and debt when they purchase a portion of an operating company.
Advantages of Selling a Piece of Your Company
Business owners are often surprised by the powerful advantages that can come with a partial sale of their company. Listed below are the seven most common and relevant:
One: Get Cash and Reduce Personal Risk
Probably the number one benefit of a partial sale is it offers an opportunity to convert some (but not all) of your ownership into personal cash. Private recaps are often described as “taking some chips off the table” for this reason. Getting cash increases personal liquidity and diversifies one’s assets, which in turn reduces stress and risk! Partial sales additionally reduce personal financial risk by often removing personal guarantees on company debt.
Two: Keep a Portion of the Company for a Later Sale
Typically, the second most attractive benefit of a private recap is you maintain some ownership in the company to sell the rest of your ownership at a later date after the company has hopefully increased in value with continued growth. In this way, private recaps are often described as opportunities to “take a second bite of the apple.”
Three: Stay Involved with the Business…Or Not
Another powerful advantage is you can customize your involvement in the business after the partial sale. If you want to remain fully involved in the business’s leadership and management, you potentially can. Or, if you wish to scale back your participation to a purely strategic or advisory role, such as serving on the board of directors, that too is commonly done. It is even possible to completely step down from all involvement in the company management or leadership and become a “silent investor.” This benefit allows you to pursue any degree of involvement—as long as your buyer agrees with and supports the plan. Perhaps the most common scenario is selling a portion of the company but remaining involved with day-to-day leadership, especially if you intend to enjoy that second bite of the apple later in the future. (Watch our recent webinar called “Cash Out Without Walking Out” webinar to learn more.)
Four: Secure Different Outcomes for Different Owners
If you have business partners, a private recap can allow different owners to pursue and potentially achieve separate and seemingly incompatible individual goals. For example, perhaps one owner is older and seeks to sell some to all of his or her ownership, but another owner is younger, eager to stay involved, and wants to increase his or her ownership. A partial sale can potentially accommodate these differing goals, whereas a full company sale could not.
Five: Create an Equity Path for Top Employees
Another advantage of the partial sales is the ability to create an equity sharing plan for top employees who currently lack ownership. Within a partial company sale, an equity pool can be created to incentivize top employees.
Six: Gain a Powerful Partner
With any partial sale, a new business partner enters the picture—the person or organization who purchases the partial interest. Ideally, this partner brings skills, knowledge, resources, and opportunities that your company leverages into accelerated growth. In the best scenario, this new partner can revolutionize your company’s future: providing capital for expansion or acquisitions, opening doors to new markets, introducing cutting-edge technology, or injecting industry-leading leadership and experience. More modest benefits can include operating cost reductions and efficiency gains if the partner brings larger economies of scale or greater market credentials.
Seven: Achieve Your Exit Goals
A partial sale of the business can be a key tactic in exit planning to achieve your exit goals. If you are like most business owners, at exit you seek to reach financial freedom, exit on your terms, and leave the company in good hands. Whether you ultimately intend to sell the company to an outside buyer, sell to your management team, or give the business to your kids, a partial sale can secure your major goals.
Conclusion and Next Steps
Private recaps are not for every owner or every company. Buyers/investors look for consistently profitable companies that, offer strong growth potential, and have capable leadership. Another point to consider: a partial sale may receive a lower valuation multiple than might be achieved with a full sale, especially if the buyer is only acquiring a minority position. However, this potential disadvantage is offset with the opportunity to pocket some liquidity now and retain ownership for the full sale at a later date—hopefully at a higher total valuation after having grown the company to the next level.
Next time you find yourself asking, “Should I sell my company?” consider rephrasing that question to read “How much of my company should I sell?” Contact us to get help answering this critically important question.