Quite frequently business owners approach us during our M&A conferences and say, “I am not interested in selling 100% of my company. I have plenty of great ideas about how to grow it and I am still motivated to do so, but I just can’t raise the capital. Banks have been no help. Are there any options for me?” Fortunately the answer is yes!
It seems that we are running into more and more middle-market business owners who are in this same predicament. Having tapped out all of the traditional sources of financing or having reached a limit on how much personal risk they want to assume, businesses are stagnating, unable to grow, even though they have opportunities to do so.
If you find yourself in this position, you might be a perfect candidate for a partial sale. This option is ideal for anyone who is motivated to grow the business, has ideas about how to do so, and is willing to give up 51% or more of company ownership in order to help the middle-market business reach its next level.
So how does a partial sale work? Your M&A advisory firm would look for a buyer (typically a private equity group but not exclusively so) who has the capital available for investing and is willing to partner with you – retain you post-sale in a leadership role – to help the company expand. As we have discussed in previous articles, there are literally hundreds of equity firms that specialize in the partial sale deal structure.
A very positive aspect of this arrangement is that it allows the current owner of the business to receive a second “bite of the apple” when the new entity is sold or taken public. Generally, during the course of five years to seven years, additional synergistic companies will be added on to the new entity after the initial acquisition.
Adding complementary businesses allows the firm to grow much faster than solely through organic methods. In addition, it combines the synergies of several companies into one, creating a real win-win scenario for all acquired firms.
As this process evolves, your 25% stake in the new entity that was formed when the equity firm funded your company grows and grows with each add-on company. Quite quickly your piece can grow from a small initial investment into something quite larger five years to seven years down the road.
Your M&A advisor can also potentially use the partial sale deal structure to bridge any valuation gaps you may have between what your company is worth today and what you want to eventually get for it. Quite often your view of the company’s worth is based on the upside potential you see with additional funding. A partial sale, which allows you access to capital and managerial help, can help you reach the level of profitability you dream of.
Beyond the potential financial benefit to you down the road, the real advantage of partnering with an equity firm is the professional operational, financial, and managerial muscle they often bring to the new entity. They recognize that you are the expert in your industry. However, you probably have not had access to financial modeling and professional management, both of which professional buyers bring to the table.
Keep in mind that many of these firms have acquired hundreds of middle-market companies just like yours over the years. The lessons they have learned the hard way on leading businesses to higher ground can be invaluable to you.
What is the downside you may ask? You have to be able to transition from being the only boss making all the decisions to being a minority owner who now has to run his ideas by someone before they are implemented. This may sound easier that it is for some folks.
If you believe that you would have trouble working with a partner (or partners) to grow your business or if the idea of not being able to make instant strategic changes is impossible for you to fathom, a partial sale may not be best for you.
You and your M&A advisor will need to have several frank conversations about a partial sale before you ink an agreement with an investor. However, if you can work as part of a team in order to fund your ideas and help your investment grow, a partial sale could be an optimal deal structure for you.
If you find yourself at a crossroads in your life where you still want to grow your company and you only need funding, please contact Generational Equity. We have closed countless deals using the partial sale structure and have enabled our clients to reap rich rewards years down the road when the second liquidity event occurs.
A key component in a partial sale is ensuring that the right investors are approached at the right time with your investment opportunity and documentation that clearly outlines your intangible assets. These “off balance sheet” assets are your company’s features that make it unique in your industry.
Generational Equity specializes in fully understanding the intangibles our clients possess and then, most importantly, finding the right investors who will see the value in your individual off balance sheet assets.
Again, a partial sale is not for everyone. We would be glad to meet with you individually at one of our M&A workshops to have preliminary discussions to see if it might fit your needs.
Bottom line: If you need capital and banks have been no help, assuming you are willing to stay and can accept giving up total control, there are options available to you. Be sure to explore them all before you make a decision, and, most importantly, use an M&A advisor to help you in this process.
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