You have spent years investing time, capital and energy to build your business, and now you are ready to take a step back. While that can be a scary thought, selling your company does not have to mean giving up all ownership benefits or interests in future profits. There are a few exit options that will allow an owner to retain either a majority or minority interest in the company and provide the opportunity to partake in future profits. Below we discuss three options for exiting owners to consider, and how they impact the buyer.
Option #1: Sell a minority interest in the company and retain control
In this situation, assuming the company has a single class of stock with the same voting rights, the seller would sell less than a 50% ownership interest in the company and retain the remaining majority ownership interest. This transaction is not the most beneficial to the buyer, so the seller may have to include terms in the purchase contract which gives the buyer the first option to purchase the majority ownership interest in the future if the seller decides to sell their remaining ownership interest. This option is a great way for the seller to start transitioning operations to a new owner while still retaining control to make decisions for the company. This method is a more hands-on option as the seller will still be involved in the day-to-day operations and will retain control to make company decisions.
Option #2: Sell a majority interest and become a passive owner
Under this option, the seller would sell a 50% or greater ownership interest in the company but still retain a minority interest. This would allow the seller to still receive a portion of future profits, which would be advantageous if the company was in a growth phase. This option would be appealing to a buyer as they would have control and would be able to make decisions for the company, while also retaining the knowledge, expertise and relationships developed by the seller. This is more of a hands-off option where the seller will no longer have control to make company decisions and may not need to be present on a day-to-day basis.
Option #3: Sell 100% but include an earnout option
An earnout is a contractual agreement, agreed upon at the time of the sale, that allows the seller to obtain additional, future payments in the event the company achieves specific milestones or financial goals as defined in the contract. The seller would sell a 100% ownership interest in the company but include an earnout provision in the purchase agreement where he or she receives future, additional payments for an agreed upon period of time. This option is commonly used to bridge the gap between the purchase price being sought by the seller and the amount the buyer is willing to pay at closing. It also allows the seller to still benefit from the future growth and profits of the company while no longer taking part in company operations or decisions.
The options above provide resolutions for owners who are wanting to exit their business but still receive benefits on the future success of their companies or take on a smaller role within the company while gradually handing the reigns off to a new owner. Owners should consider their specific situation and determine which option(s) work best for them. Anders has Forensic, Valuation and Litigation advisors to help understand the true value of the business and Business Transition Planning advisors to help maximize value and exit your business. Contact an Anders advisor below to learn more.All Insights