Should I sell all or part of my equity?
This decision comes down to two questions:
1. How compelling is the opportunity for our company in this industry?
2. How compelling are these new owners as partners and business builders?
If you feel good about both questions, you might consider having a “second bite at the apple” by retaining some of your equity.
The acquisitions we’ve done where we are able to combine our strengths with the seller’s have been the most fun—and the most lucrative. Sometimes a buyer will require you retain a portion of your equity as a vote of confidence in the company you are selling, or because your continued contribution is critical to success.
In a few (rare) cases the seller’s retained ownership has been worth more than the original stake sold. Let’s look at that math. Assuming you retain 20%, the company value would have to increase 4x (i.e., worth more than the original 80% that was sold). That sounds unlikely, but if you can compound growth annually at 40% for four years then you can quadruple the business. In fact, at a 25-35% growth, potential buyers will often pay a higher “growth” multiple that can quadruple value over four years.
But if you retain a piece of the company, here are the initial questions you should ask the buyer:
1. How compelling is the opportunity for our company in this industry?
2. How compelling are these new owners as partners and business builders?
If you feel good about both questions, you might consider having a “second bite at the apple” by retaining some of your equity.
The acquisitions we’ve done where we are able to combine our strengths with the seller’s have been the most fun—and the most lucrative. Sometimes a buyer will require you retain a portion of your equity as a vote of confidence in the company you are selling, or because your continued contribution is critical to success.
In a few (rare) cases the seller’s retained ownership has been worth more than the original stake sold. Let’s look at that math. Assuming you retain 20%, the company value would have to increase 4x (i.e., worth more than the original 80% that was sold). That sounds unlikely, but if you can compound growth annually at 40% for four years then you can quadruple the business. In fact, at a 25-35% growth, potential buyers will often pay a higher “growth” multiple that can quadruple value over four years.
But if you retain a piece of the company, here are the initial questions you should ask the buyer:
- Why are my protections as a minority shareholder?
- What are your return and timeline expectations?
- What contribution do you expect me to make?
- If I want to sell my remaining shares, how do I and at what price?
- How will we use free cash flow?
- What happens if we need more cash to operate, or for growth?
- How much and what type of debt will you use to acquire the company and how will that affect operations?