We are all somewhat familiar with the concept of full acquisitions whereby 100% ownership transitions from one party (the seller) to another (the buyer) in exchange for cash. This is also known as a clean break but an acquisition can take many forms depending on the terms of the deal. It may be that the acquirer wants the owner(s) to stay on to have their earnings paid out gradually over time and thus be conditioned upon their continued stay with the company for a certain period. Of course, when founders seek to exit their company on the private market, it is commonly driven by a desire to move on and cash out their chips so-to-speak. Negotiating a full acquisition, however, sometimes changes the outcome of that.
But if you are a business owner that loves running your business but want to cash out on some of your business’ value today without foregoing all of its value in the future, why not get some liquidity in your personal finances whilst staying on as a majority or minority shareholder? This is made possible by replacing current business partners or taking on new ones in an active or passive capacity by offering them non-voting stock or a minority stake.
There are scenarios where a business owner will want to sell a portion of equity in the company to someone interested in taking on an active role in managing and/or growing the business. The most straightforward is in the case of an existing co-founder/owner, who for one reason or another is looking to exit the company. This makes sense when the remaining co-founder(s) don’t want to exit themselves and don’t have the capital on hand to buy them out, and subsequently want another business partner to take on the role and responsibilities of the departing team member.
Of course, onboarding a new active business partner requires a fit with the existing member(s) in terms of skill set, ambition and chemistry but a lot of experienced buyers can be found this way who may be able to take the business to another level. The benefits of buying into an existing business are manifold including foregoing the risk and labour of building something from nothing to instead join a more defined business in need of more hands. This offers an alternative to the traditional binary constellation of either working for an employer or starting a company from scratch.
Another scenario is for one-man business owners, also known as solopreneurs, who wish to share the burden in return for sharing the proceeds by onboarding a new business partner. This could be viewed as an alternative to hiring as well as a means to increase liquid personal assets. This would typically be selling a minority stake of one’s private equity anywhere between 1-49% to assume control of the venture. Doing so also derisks the potential liability of owning a business and can make the experience of being self-employed much more fulfilling doing it with someone rather than going by it alone.
Screening buyers suddenly becomes about more than just pricing and terms of the deal as the seller looks for a specific profile to help expand or manage aspects of the business. This scenario could also be one where the owner simply wishes to take a backseat in the business and hand over the reins of the day-to-day and direction of the company over to someone younger or more experienced. This would often entail selling 50% or more.
For business owners who wish to sell part of their company but not forego any control or decision-making power, and for buyers who wish to own part of a company more as an advisor than as an active partner, selling/buying non-voting equity is a popular solution. You may be asking what the difference between that and investing is, but actually selling existing shares of a private company instead of diluting the equity pool makes the process a lot easier. Buying-in vs investing can look a lot alike to the untrained eye but is primarily about expectations.
Buying into a company is usually done from a different set of motives than a typical investor would have. Growth has a lot to do with that, where an investor would expect 5x ROI in capital gains upon a future exit, a buyer might be more interested in receiving dividends over the course of the company’s lifetime as a sort of passive income from its profits paid out as earnings to its owners. The profile of a company with investors vs one without is typically also very different in the way a mobile app business compares to a VC-backed B2B SaaS company. The aims of the buyer and seller can also be achieved via a minority stake of preferred stock, but this way an owner can cash out much more of the value of the business today whilst retaining control.
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