Owning and operating a business is rewarding but altogether a risky endeavour. A common pitfall for founders who successfully manage to create cash flow in their business, is that most if not all their net worth gradually gets tied up in a single asset (their business). It can seem like the only option for realising a return on the value created in the business is to sell it off completely. However, a full acquisition means a full exit thus foregoing all future returns as the founder and leaving it to the new owners taking it over. It can be a bittersweet experience departing a business built from the ground up only to watch it reach new heights under new management.
To minimise regrets and mitigate the risks associated with ownership, business owners are starting to open their eyes to the option of a partial sale. Selling a piece of their business allows them to stay invested in future upside while realising a return on the value of their asset. These so-called recapitalizations or partial buyouts help acquirers buy either a majority or a minority stake in the enterprise, while the founder retains residual ownership, enabling them to remain involved in the ensuing success of their business. This way, selling less than 100% ownership is a way for founders to achieve a partial exit by taking some chips off the table and onboard partners to share in the burden of owning and operating a business.
Unsurprisingly, most of a founder's wealth is locked up in their company. This makes sense because small private businesses are a fairly illiquid asset class and taking cash out of the business always comes at the cost of the growth it could have contributed to had those resources been reinvested instead. However, many entrepreneurs struggle with the fear that one day their business might become obsolete, for example because of a shift in technology, consumer preferences or new players bringing competing products to market. This fear is a strong motivator for founders to cash out all their chips and sell off their business. And rightfully so!
But there is another option: partial exits! Prudent business owners can ensure they get to lead a comfortable lifestyle by selling a stake in their business and taking home enough cash to secure their way of life. This security allows entrepreneurs to focus on the right areas of the company they built without growing too risk-averse because mistakes could mean their personal financial ruin. And there are several ways to structure a partial sale depending on whether founders want to stay very involved by selling a minority stake, or take a step back by selling a majority stake to an operational acquirer like a search fund.
Ownership in a small or medium-sized business is about as illiquid as it gets. As opposed to the public markets, owners of SMBs cannot simply list shares to be sold to a retail investor on Robinhood, nor do the largest institutional investors take an interest in them. Hence, liquidity is usually constrained to pay out earnings, which can be especially difficult if a business is very capital intensive, for example if it holds a lot of inventory or has a lot of staff on payroll.
So far, entrepreneurs have seen full buyouts as the only option to convert captable ownership to cash in their pockets. And while it is the best option for many, it can lead to some looking for a new job or project to start afterwards, speculating what would have happened if they had stayed with the business.
The trend of partial exits marries the benefits of both aspects. Entrepreneurs get to withdraw a large amount of liquidity from an acquirer via a secondary transaction - often much, much more than could ever be withdrawn from bleeding the business for its profits - while maintaining their stake in the future upside of the company.
Maybe the most convincing reason for business owners not to sell their company immediately is the so-called double dip. This option allows founders to sell a majority stake of their business to an buyer but stay on for a while longer. In this time, the acquirer and the entrepreneur collaboratively grow the company, fueled by the operational expertise and leverage of the newly joined co-owning partner.
Down the road, typically after a few years, both the partner and entrepreneur sell off the business collectively to a sole acquirer. Because the business has grown after the founder sold their majority stake, they get to sell on the remainder of their shares at a higher valuation, allowing them for a second, potentially much more lucrative “dip”. Both the initial majority sale and the subsequent minority sale via a full acquisition down the line can happen on a marketplace like BitsForDigits.
Experienced buyers such as micro private equity firms, family offices and search funds tend to go above and beyond the capital they supply to the founder. Assets especially helpful such as relevant network, operational expertise and financial engineering know-how can elevate the entrepreneur’s business to the next level.
This help can be especially impactful for founders who are domain experts but seek a set of complementary skills to balance out their operations. Especially technical founders of SaaS businesses for example benefit from the marketing and sales prowess which business savvy acquirers can bring to the table when they buy into the business. For that reason, many choose to transition from CEO to CTO after a majority sale has taken place.
Matching the right business with the right acquirer is challenging. Entrepreneurs are commonly left to Google search for potential buyers, use whatever personal network they have or to simply wait until someone reaches out cold. Acquirers, on the other hand, often have to scour the web for suitable businesses and spend immense amounts of time cold-emailing founders with limited success. This is where our platform, BitsForDigits, helps both parties connect around the concept of full partial acquisitions - anonymously and free for founders!
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