How to Sell a Portion of a Business – Should You Sell a Share of Your Company

FAQ

What is it called when you sell part of your company?

There are several terms used to describe selling a portion of your business, depending on the specific structure of the transaction. Common terms include equity stake, recapitalization or spin-off.

Selling a portion of your company brings in new capital, expertise, or resources. It can also lead to changes in ownership structure, governance, and potentially, even the company’s strategy.

Business owners choose to sell a portion of their business for various reasons, including raising capital, sharing risks and rewards, facilitating succession planning, or improving financial health among other potential reasons.

In the dynamic landscape of business ownership, the decision to sell part of your business is pivotal. This choice, often driven by strategic considerations, can unlock significant value, offering a fresh influx of capital or bringing in strategic partners to propel your business forward. In this article, Raincatcher’s M&A experts delve into the intricacies of selling part of a business, drawing on their extensive experience to guide you through this complex process.

Understanding the Basics of Selling a Part of Your Business

Imagine Sarah, founder of a thriving bakery chain. She’s passionate about her business but desires to expand into new territory but limited access to capital restricts her company’s growth plans. Selling a part of her business, an asset or equity stake, to a strategic investor could provide the resources needed for the business’s expansion while allowing Sarah to maintain control over key decisions.

Entrepreneurs like Sarah may choose to sell only a portion of their business. They might seek to:

  • Raise capital

     Strategic partners or venture capitalists can inject fresh funds to fuel growth initiatives, product development, or acquisitions.

  • Share risks and rewards

     Partnering with another company allows you to leverage their expertise and resources while mitigating risks associated with expansion or new ventures.

  • Facilitate succession planning

    Selling a part of the business to key employees or another investor can incentivize talent retention or align with another strategic partner which can help to prepare for a smooth ownership transition in the future.

  • Improve financial health

    Divesting a non-core asset can free up capital for core operations and improve the overall financial health of the business.

Considering the consummation of a business deal may require significant time, knowing how long it takes to sell a business may also influence a part sale. By understanding your motivations to sell part of a business and aligning them with the right type of partial sale, you can unlock significant value for your business.

Related Content

If you don’t already understand the M&A process inside and out, start by reading our how to sell a business article.

Types of Partial Sales

There are several ways to sell part of your business, each with distinct advantages:

  • Equity or Asset Stake: This involves selling a percentage of ownership in your company, often to investors or strategic partners, in exchange for capital.
  • Divestiture: Selling off a specific business unit, product line, or subsidiary allows you to streamline operations and focus on core competencies.
  • Spin-off: Creating a new, independent company from a part of your existing business can unlock value for both entities and attract targeted investors.
  • Joint Venture: Partnering with another company to co-own and operate a new venture leverages combined expertise and resources for mutual benefit.

 

The best option to sell a business depends on your specific goals and the nature of the asset you want to sell. Consulting with an experienced M&A advisor like Raincatcher can ensure you choose the optimal path for your business.

Assessing Your Business’s Readiness

Before embarking on a partial sale, it’s crucial to assess your business’s readiness. Here are 3 key areas to consider:

Factor

Description

Financial Health

A strong financial track record with profitability, manageable debt, and a clear growth trajectory is essential to attract buyers.

Market Position

Operating in a growing industry with a sustainable competitive advantage positions your business for a higher valuation.

Operational Efficiency

Streamlined operations, a skilled workforce, and well-defined processes demonstrate a well-oiled machine primed for continued success.

By addressing these aspects and ensuring your business is in top shape, you’ll attract more qualified buyers and potentially command a premium price.

The Do’s and Don’ts of Selling a Portion of Your Business

Do:

  • Plan Early: A successful partial sale requires meticulous planning. Assemble a team of legal and financial advisors to navigate the complexities of the transaction.
  • Know Your Value: Obtain a professional valuation of your business to establish a realistic asking price and avoid undervaluing your equity.
  • Target the Right Buyers: Identify potential buyers who understand your industry, appreciate your value proposition, and possess the resources to contribute to your growth strategy.
  • Prepare a Compelling Offering: Develop a clear sales pitch that highlights the benefits of partnering with your business and the unique value you bring to the table.
  • Negotiate Skillfully: Be prepared to negotiate key deal terms like ownership percentage, valuation, and governance structure.

Don’t:

  • Go It Alone: The M&A process is intricate. Partnering with an experienced M&A advisor ensures a smooth transaction and protects your interests.
  • Overestimate Your Value: An inflated asking price can deter serious buyers. Be realistic in your expectations and base your valuation on industry data.
  • Neglect Due Diligence: Transparency is key. Provide potential buyers with comprehensive access to financial records and other relevant information to facilitate a smooth process.
  • Rush the Process: Finding the right buyer takes time. Don’t be pressured to accept the first offer. A well-managed sale process ensures you find the ideal partner for long-term success.
  • Underestimate Communication: Maintain open communication with key stakeholders, including employees and management. Address concerns and provide regular updates throughout the process.
  • Assure Confidentiality: If you are approaching a competitor to buy your business, you’ll want to share a limited amount of information up-front and progressively share more and more as the contemplated sale progresses.

Creating Value through the Strategic Sale of a Portion of a Business

Selling a part of your business can be a powerful strategy to unlock hidden value. Here’s how:

  • Enhanced Growth Potential: Strategic partnerships or capital infusions can fuel expansion plans, research & development, and industry penetration, propelling your business to new heights.
  • Improved Industry Credibility: Partnering with a well-established company can enhance your brand reputation and attract new customers who value your association.
  • Access to Expertise and Resources: Strategic buyers often bring specialized knowledge, operational efficiencies, or distribution networks that benefit your business.
  • Increased Liquidity: Equity sales provide immediate cash flow that can be used for debt repayment, investment in other ventures, or rewarding key employees.

 

A recent example illustrates this point. According to a Harvard Business Review article, medical device company Medtronic partnered with a software company to develop a new generation of pacemakers with remote monitoring capabilities. This strategic partnership accelerated innovation and expanded Medtronic’s market reach, creating significant value for both companies.

By carefully considering these factors and crafting a strategic sales approach, you can maximize the value you receive from selling a part of your business. Also, understand that these transactions may drag on for well over a year as all parties have a business to run full-time in addition to addressing the portion acquisition.

You can learn more about this in our how long does it take to sell a business article.

Conclusion

Selling a part of a business is a nuanced decision that requires careful consideration and strategic planning. By adhering to the do’s and don’ts outlined and leveraging the expertise of a professional M&A firm like Raincatcher, business owners can navigate this complex process effectively.

Raincatcher’s team of M&A experts can guide you on it a part sale or an outright sale, ensuring you achieve a successful outcome. Contact us today for a consultation and explore how we can help you unlock the full potential of your business.