Founder exits: When to take a partial buyout vs a full acquisition

March 10, 2022

Every founder has thought about the prospect of eventually selling their business. However, not everyone starts a business with this goal in mind. The hardcore mission-driven founders, for example, tend to be in it for the impact they get to create through their venture. Lifestyle entrepreneurs are not necessarily seeking one big pay day either. Some business owners are simply in the empire business and would not part with their life’s work at any price - or at least not until it has reached nearer its full potential. 

Nevertheless, the Jeff Bezos and Mark Zuckerbergs of this world who arguably are empire builders, still manage to have their cake and eat it too by taking their internet companies public. An IPO allows them to liquidate and lend against their company shares to finance their lifestyle while staying in the company. But similar to how they share their equity with the public market, bootstrapped founders of online SMBs can sell all or part of their ownership on the private market.

Hence, entrepreneurs eventually face a choice: sell a stake in their business to a prospect partner or sell the entire company in a full acquisition. There are countless acquirers in the market for both company stakes and full companies. So, to arrive at an answer for which alternative is best, below are three essential questions to ask yourself as a founder of a profitable internet business when contemplating the desirability and timing of a (partial) exit.

Is your heart no longer in the work you do at your business?

If the answer is a 100% yes, then a full acquisition is likely the best path to take. But take a Sunday to yourself, catch up on rest and ask yourself again if either the line of business or the actual work that you do is what is weighing on you. A two-week holiday can sometimes make all the difference but other times more drastic measures are needed. 

One possible solution to the problem of work fatigue could simply be the actual day-to-day tasks you are performing today, which stand in contrast to what you like to work on. Oftentimes builders can find themselves doing work they do not like and are not necessarily good at either once their business scales. This is the perfect time to onboard new partners who can help take on certain responsibilities or finance a hiring spree. Here, a popular choice amongst technical founders is to have an acquirer buy a majority of their business and have them work in a different capacity and role, for example as a CTO. Other professionals then come in to administer the business as CEOs.

If neither a long vacation or a change in focus at the company appear to change anything, a full exit might be the right solution. But it is very much worthwhile to explore a partial buyout beforehand.

million dollar payout

Are you concerned about the future survival and viability of your business? 

A common feeling carried by founders of profitable businesses is one of anxiousness about the future of their company. Sure, it is going well today but what about tomorrow? Having most if not all your net worth tied up in what is essentially an online asset is risky, no matter how you look at it. And that risk is often what keeps entrepreneurs from taking their business all the way. 

Disconcerted by the uncertainty of their business’ success (especially the longer time horizon), owners can choose to hedge their bet by selling a stake of their business to a buyer. The acquirer of that stake can often bring operational excellence to the table. Whichever partner one chooses, it effectively allows the business owner to stay invested whilst taking some cash and risk off the table via a secondary transaction. Knowing that they have secured a nest egg can help founders focus on the future more calmly and help them not become too risk averse. 

Moreover, a lot of founders can feel ill-equipped to deal with the challenges they face on a daily basis outside of their domain expertise and even less prepared for the challenges on the horizon be they internal to the business or externally-derived from the market. In a fast-paced environment such as the internet economy, it is of course prudent to weigh the odds of maintaining a competitive advantage with new market entrants and changing customer preferences. This is where a lot of founders can lose faith in their business, and sometimes for good reason if experiencing negative growth from an outdated product or service. But sometimes all they need is the right capital partner with the right skills and/or network to help the business through whatever headwinds it’s facing. 

Hence, if owners believe in the long-term viability of their business and that they have a place in it, they should likely consider a partial exit before contemplating a full acquisition and leaving the company.

Are you comfortable placing your business in the hands of a stranger and giving up all influence over it?

Similar to the last question, make sure you are of sound mind when answering this one. Selling a business as opposed to a piece of it is no breeze either so you have to really want to part with it. 

Still, if after careful consideration you decide the answer is yes, the next question becomes about timing. When should you sell? Some think the best time to sell is just as the business is about to peak at the summit and others while it is experiencing growth at the foot of the mountain. There is no right answer here as long as it has a good product-market fit with revenue streams and profitability.

If the answer is no, and you would prefer to keep your name on the business that you have built then the option of a partial exit can be a good fit. Owners then have to ask themselves how much influence they wish to give up to an outsider. Selling a majority stake means giving up operational control and holding a minority interest. But either way, the founder gets to stay invested in the business and does not lose out on future upside. 

Resources: 4 Scenarios When You Should Sell Your Business, Top 5 Reasons to Sell Your Business

About the author
Laurits Just

Laurits is the co-founder of BitsForDigits. He has extensive experience in the world of startups, tech and finance. Before building a Micro Private Equity marketplace, he worked for BlackRock and Rocket Internet.

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