After investing your time, money, and sweat equity to start a business, what is your next step when you are ready to enjoy the fruits of your labor? While you may not know where to start, it does may not be as ominous as you think. There are a number of options that offer you the opportunity to begin transitioning out of your company if you do not wish to sell it outright.
There are exit options that allow business owners to retain a majority or minority interest in the business and reserve your right to future profits of the business.
Scenario 1:
Business Owner May Retain a Majority Interest in the Business (Maintaining A Controlling Interest)
Here, Seller would maintain more than a 50% ownership interest (majority ownership) in the business while selling a minority share (49% or less) to the purchasing party. While this scenario is not as favorable to the buyer, seller can retain control while transitioning the business over to a new member. To make this scenario more favorable to a prospective buyer, seller can include terms wherein buyer may have the right of first refusal to purchase the majority interest in the future if seller decides to sell their remaining interest. Seller may also entice a prospective buyer by including commission percentages or bonuses based on various benchmarks that are met by the potential minority owner. Again, this option is great for a seller looking to start transitioning operations to a new owner while still retaining control to make decisions for the business and maintain a more hands-on role in the day-to-day operations.
Scenario 2:
Business Owner May Sell the Majority Interest and Become a Passive Owner
Under this scenario, seller would relinquish 50% or more of their ownership in the company while retaining a minority interest allowing seller to receive a percentage of future profits of the business. This would be a good option for a business owner looking to sell the business during a growth phase. The option is also more attractive to potential buyers who would hold the decision-making role of the business along with running the day-to-day operations. An additional benefit to the prospective buyer is the presence of the seller (who can provide the knowledge, expertise and relationships developed prior to the sale). This is a good option for a seller looking for a hands-off approach, while also providing guidance and receiving a percentage of profits.
Scenario 3:
Business Owner Sells 100% Ownership
In this scenario, a business owner may sell 100% of their interest in the business, losing all rights to any decision-making. There are a number of different options at seller’s disposal to structure a sale while ensuring that they receive proper compensation. One such option is an earn-out provision, which is a contractual agreement. The terms are usually agreed upon at the time of the sale, allowing the seller to receive additional, future payments in the event the company reaches certain milestones or financial goals as defined in the contract for an agreed upon period of time. This option may be attractive if a suitable buyer may not offer the price sought by seller, as it bridges the gap between the purchase price and what the seller was hoping to get. An earn-out 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. Seller may also provide owner financing if seller is not willing to sell for less than what they projected.
In Conclusion
Business owners should take the time to consider their specific situation and determine which option(s) work best for them based on their goals and lifestyle. At Roy Law, we are here to help business owners who are considering transitioning out of their business to help them set expectations while getting them the best value for the business they worked so hard to build. Call us today at 504-521-4814