By: Patrick Ungashick

Back in 2011, when Apple announced the retirement of its founder and visionary leader Steve Jobs, the company’s value immediately fell by about $10 billion. (That’s billion with a B.) This dramatic loss of value occurred even though Jobs’ departure had been expected for some time, and his successor Tim Cook was a highly respected leader already established within the company. Investors were simply too disturbed and uncertain about how the company would fare without Jobs as CEO.  

Since then, most of us know that Apple has not only survived, but it has thrived under Cook and other talented leaders. There is an important lesson for business owners with small to mid-market companies: when it is time for you to exit, it must be clear to everybody involved that your company can not only survive your departure but can actually thrive without you going forward. If the company’s leadership is uncertain without you, you find it very difficult to exit happily. Here’s why.

Owner Dependency 

We call this issue, “Owner Dependency.” Within many small to mid-sized businesses, the owner is the most valuable and vital employee, and the company is highly dependent on this owner’s involvement. If you lead an owner-dependent company, then your knowledge, relationships, and vision are what drives the business. Undoubtedly you have help—few CEO/owners build a business alone. But much of your company growth has been due to your personal presence and efforts.  

None of this is a problem, as long as you have no desire to go anywhere. But, one day, you will wish to exit. If, at that time, you remain an essential employee, you may face several serious challenges that can undermine or outright block your exit. Here are four examples: 

Lost Business Value 

Apple lost $10 billion when a flood of investors sold their stock upon learning Jobs was stepping down. In their minds at the time, the company was less valuable without him. 

The same may happen to you and your company when you exit. If you intend to sell your company one day, buyers may reduce their offer price (or take a pass altogether) if they have questions and uncertainty about the company’s future without you. You might not lose $10 billion, but if buyers reduce their offer price by even a few tenths of a multiple, that can add up to a serious loss of value for you.  

If the value loss is severe enough, you might be in jeopardy of never reaching personal financial freedom at exit—which is most owner’s number one exit goal. 

Lost Legacy 

For most owners, achieving a happy exit is not just about the money. It’s also about making sure that you leave the company in good hands, and that the company is well–positioned for success going forward. A company that may not run effectively without you faces an uncertain future once you exit. Most owners will not want to take that risk. 

Lost Control 

When you exit from your company, you will want to be in control of how you do this. For example, you will want to exit when you choose to, and not when somebody else dictates. You will also want to transition away from the company in the manner of your control. Some business owners want to make a quick transition, moving on to pursue other interests. Other business owners prefer to stay with the company for an extended transition, staying involved in some supporting role, such as serving on the board of directors. Whatever your preferences, if the company is unable to operate effectively without you, your ability to control your own exit will be restricted or forfeited. You can’t exit on your terms as long as your company needs you every day.  

Big Uncertainty About Life After Exit 

One of the biggest challenges owners face in life after exit is finding activities and interests that provide meaningful involvement once your role in the company has reduced or ended. If your company is highly dependent on you, typically, that means you rarely or never unplug from the company for any significant period of time, beyond perhaps a brief vacation here or there. Without taking an extended time to unplug, you cannot develop and test-drive your ideas for activities and interests after exit. And, without taking time to unplug, you cannot create an organization that learns how to function without you.  

It will not matter how much money you might have in the bank at exit, or how well the company is doing after you exit, if you wake up every day without something engaging and rewarding to do with your time and talent.  

Get Started Now 

Apple’s setback reveals that all business value is fragile. One of the world’s largest and most admired companies felt the negative impact of being potentially overly dependent on a single leader.  

Building a leadership team that can lead and grows the company without you takes time, typically years of focused effort. An important part of any exit plan is developing competent and loyal successor leaders. The sooner you get started, the more likely you achieve a happy exit.  

To learn eight tactics to address owner dependency, read this article. And, contact us to discuss your situation and how we help owners like you achieve happy and successful exits. 

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499

By: Patrick Ungashick

Business owners often think about exit as an all-or-nothing event. For example, “Should I sell my company?” is a more commonly asked question than “How much of my company should I sell?” Yet in many situations selling only some of your business can achieve many of your exit goals, while leaving you owning a portion (and perhaps even a controlling portion) of your business. Here’s how.

The Basics of Partial Company Sale

Selling less than 100% of your company to an outside buyer/investor is usually called a private recapitalization, or recap for short. Any amount can be sold, and private recaps occur where the buyer acquires anywhere from 10% to 90% of the target company. A critical question is whether the buyer acquires a controlling interest in the company, meaning, of course, more than 50% of the voting stock. However, buyers who acquire less than 50% will still negotiate into the deal-specific ownership rights, called supermajority rights, that give them a direct say in strategic issues such as whether or not the entire company is to be sold. Therefore, whether or not you sell more than 50% largely impacts who is in charge of the day-to-day operations of the company.

Potential buyers include wealthy individuals, private equity groups (PEGs), family offices, and sometimes other companies that see a strategic fit with your business. Buyers will often use a combination of equity and debt when they purchase a portion of an operating company.

Advantages of Selling a Piece of Your Company

Business owners are often surprised by the powerful advantages that can come with a partial sale of their company. Listed below are the seven most common and relevant:

One: Get Cash and Reduce Personal Risk

Probably the number one benefit of a partial sale is it offers an opportunity to convert some (but not all) of your ownership into personal cash. Private recaps are often described as “taking some chips off the table” for this reason. Getting cash increases personal liquidity and diversifies one’s assets, which in turn reduces stress and risk! Partial sales additionally reduce personal financial risk by often removing personal guarantees on company debt.

Two: Keep a Portion of the Company for a Later Sale

Typically, the second most attractive benefit of a private recap is you maintain some ownership in the company to sell the rest of your ownership at a later date after the company has hopefully increased in value with continued growth. In this way, private recaps are often described as opportunities to “take a second bite of the apple.”

Three: Stay Involved with the Business…Or Not

Another powerful advantage is you can customize your involvement in the business after the partial sale. If you want to remain fully involved in the business’s leadership and management, you potentially can. Or, if you wish to scale back your participation to a purely strategic or advisory role, such as serving on the board of directors, that too is commonly done. It is even possible to completely step down from all involvement in the company management or leadership and become a “silent investor.” This benefit allows you to pursue any degree of involvement—as long as your buyer agrees with and supports the plan. Perhaps the most common scenario is selling a portion of the company but remaining involved with day-to-day leadership, especially if you intend to enjoy that second bite of the apple later in the future. (Watch our recent webinar called “Cash Out Without Walking Out” webinar to learn more.)

Four: Secure Different Outcomes for Different Owners

If you have business partners, a private recap can allow different owners to pursue and potentially achieve separate and seemingly incompatible individual goals. For example, perhaps one owner is older and seeks to sell some to all of his or her ownership, but another owner is younger, eager to stay involved, and wants to increase his or her ownership. A partial sale can potentially accommodate these differing goals, whereas a full company sale could not.

Five: Create an Equity Path for Top Employees

Another advantage of the partial sales is the ability to create an equity sharing plan for top employees who currently lack ownership. Within a partial company sale, an equity pool can be created to incentivize top employees.

Six: Gain a Powerful Partner

With any partial sale, a new business partner enters the picture—the person or organization who purchases the partial interest. Ideally, this partner brings skills, knowledge, resources, and opportunities that your company leverages into accelerated growth. In the best scenario, this new partner can revolutionize your company’s future: providing capital for expansion or acquisitions, opening doors to new markets, introducing cutting-edge technology, or injecting industry-leading leadership and experience. More modest benefits can include operating cost reductions and efficiency gains if the partner brings larger economies of scale or greater market credentials.

Seven: Achieve Your Exit Goals

A partial sale of the business can be a key tactic in exit planning to achieve your exit goals. If you are like most business owners, at exit you seek to reach financial freedom, exit on your terms, and leave the company in good hands. Whether you ultimately intend to sell the company to an outside buyer, sell to your management team, or give the business to your kids, a partial sale can secure your major goals.

Conclusion and Next Steps

Private recaps are not for every owner or every company. Buyers/investors look for consistently profitable companies that, offer strong growth potential, and have capable leadership. Another point to consider: a partial sale may receive a lower valuation multiple than might be achieved with a full sale, especially if the buyer is only acquiring a minority position. However, this potential disadvantage is offset with the opportunity to pocket some liquidity now and retain ownership for the full sale at a later date—hopefully at a higher total valuation after having grown the company to the next level.

Next time you find yourself asking, “Should I sell my company?” consider rephrasing that question to read “How much of my company should I sell?” Contact us to get help answering this critically important question.

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.