Middle market business owners are increasingly choosing to sell only part of their business. According to the latest figures from Capital IQ, the part sale of businesses with a value of less than $20million has grown from 12 per cent to 25 per cent over the last seven years.
Part selling involves selling shares (most often a minority interest) in your business through a trade sale or to a private equity firm. It allows the business owner to release some capital from the business while still retaining active involvement.
Where traditionally business owners have shown an aversion to selling equity in their business, today’s owners are seeing a number of significant benefits.
Part selling can offer substantial advantages including the introduction of a new partner that can add equity and new thinking to help the business grow more rapidly. Bringing in a new partner can also help the owner to reduce their own risk profile and diversify their investments – freeing up capital to be invested elsewhere such as superannuation.
This strategy can also offer a transition into retirement. As people are living longer they are increasingly choosing to work longer. Selling part of the business could allow the owner more leisure time while still being actively involved in the future of the business.
For the purchaser, the partial purchase of a business can be very attractive. Business continuity and stability as well as increased growth potential are more likely if the business owner remains actively involved for some time following the sale.
In the case of a private sale, purchasing only a percentage of the business can provide the platform for aspiring entrepreneurs who may not otherwise be able to afford 100% of the business upfront. Indeed, we are increasingly seeing the part sale of a business as the basis of a succession plan with the business being gradually sold down to the original owner’s children or loyal employees.
Before entering into a sale agreement, business owners must take an honest look at the reasons for selling. The specific objectives will determine the most suitable buyer and structure of the transaction, for example; if you’re planning to grow the business you will need to select an appropriate partner with a demonstrated track record who can add ‘real value’ to the business.
The structure and documentation of a part sale is often more complex than a full trade sale. It is important to seek the right advice as early as possible.
Top 5 Tips for Part Selling your Business
- Ask the question: What is my main motivation for part selling?
- Undertake a financial health check to determine whether the financial position clearly identifies where the business can grow.
- Seek the advice of an accountant who can act as an independent expert to analyse details relating to the sale.
- Select a partner with a demonstrated track record who can add value to the business.
- Don’t rush the sale. Learn the process involved and allow sufficient time to determine how the business can benefit. Ensure a clear focus on the desired end result – business growth.