InSight

Exit and Growth Strategies for Middle Market Businesses

The Basics of A Partial Company Sale

By David Hulett | Aug 15, 2019

Business owners often think about exit as an all-or-nothing event. Yet in many situations selling only some of your business can achieve many of your exit goals. Here’s how.

The Basics of A Partial Company Sale

Selling less than 100% of your company is called a private recapitalization, or recap for short. 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 more than 50% of the voting stock. 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 private equity groups (PEGs), family offices, and other companies.

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.

One: Get Cash and Reduce Personal Risk

The number one benefit of a partial sale is it offers an opportunity to convert some of your ownership into cash and reduce risk. We are finding that many entrepreneurs want to de-risk their lives but they are not ready to quit altogether.

A partial sale can allow for an entrepreneur to “take chips off the table” and still run the company.

Two: Keep a Portion of the Company for a Later Sale

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, typically to your new partner.

Three: Stay Involved with the Business…Or Not

If you want to remain fully involved in the business’s leadership and management, you potentially can. 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. This benefit allows you to pursue any degree of involvement—as long as your buyer agrees with and supports the plan. The most common scenario is selling a portion of the company but remaining involved with day-to-day leadership.

Four: Secure Different Outcomes for Different Owners

If you have business partners, a private recap can allow different owners to pursue and achieve separate and incompatible individual goals. A partial sale can accommodate these differing goals, whereas a full company sale could not.

Five: Create an Equity Path for Top Employees

Another advantage of the partial sale 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. 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.

Conclusion and Next Steps

Private recaps are not for every owner or every company. 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 can be offset with the opportunity to pocket some liquidity now and retain ownership for the full sale at a later date.

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?” CFA can help you answer that question.


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