Should I Sell Part of My Business?
Why would a business owner sell part of their business? Particularly when they have been the 100% owner for many years. Certainly, the traditional track is for owners to explore a 100% internal or external sale as they near retirement. Yet, the partial sale is becoming a more and more common type of transaction that owners consider five or more years before retiring. While it can introduce a few potentially risky variables, a partial sale is a way for an owner to accomplish a couple of key goals. First off, it allows an owner to take a few chips off the table while remaining in the role of owner and leader of the business. This is appealing to owners who have good portion of their net worth wrapped up in their business and would like to convert some of their equity into cash. By selling 60 to 90 percent of their business to an investor, they get a significant lump sum to set aside for retirement while they continue to work for another few years. Those last few years before retirement can wind up being a lot less stressful knowing that retirement plans are not at risk should the business take a turn for the worse. The other appealing aspect of a partial sale is that the right investor can help an owner grow the business. Help from an investor can look quite different depending on the investor. A few ways investors may help include:
Acquisition experience and capital: If someone is buying all or part of your company, it is likely not their first rodeo. They can take that expertise and apply it to your business to help fund and navigate growth through acquisitions.
Back-office support: A common investor model is to have a platform company that provides accounting, finance, marketing, or human resources support to help with administrative tasks so owners can focus on growth.
Equity incentives: Some investors look to incentivize the management team with equity or equity incentives as a key to unlocking growth.
Network connections: Whether it is through other companies they own, experience growing a company in your city or region, or connections to national accounts, an investor can potentially connect you with new clients.
A key reason that partial sales are relevant today is that the capital waiting to be invested by private equity firms reached a record high in the first half of 2020. Private equity firms are typically the ones initiating partial purchases of HVAC companies although a partial sale can also be led by an individual investor or even another HVAC company. In addition to the amount of available capital, what is also relevant is the amount of attention the HVACR industry is getting from private equity investors. As the HVAC industry outperformed many other industries throughout the pandemic, investors with dollars to invest have taken notice. That has translated into more and more private equity investors looking for HVAC partial or full buy-out opportunities. As you think about the potential retirement and succession tracks for your business, this could be a trend that aligns with your goals. If you are a few years out from retirement or even a decade away, it is an avenue that may be worth exploring if you are looking to cash-out some equity. Ultimately, if all goes as planned, your business grows after your initial sale and the value of the retained equity grows significantly. While you may initially sell 70% of your business and the other 30% retained equity five years later, the goal is to sell the retained equity at a higher valuation than your initial 70% sale. Of course, there are risks as well. You could wind up with a business partner you do not see eye to eye with on key issues. The investor may wind up getting more involved in your business than they initially indicated. You may also find that the growth plan does not pan out and therefore doesn't deliver on the promise of selling your retained equity at a high valuation. Certainly some of these challenges can arise with outside investors so going into this type of transaction eyes wide open is certainly advisable. With that in mind, a few keys to maximizing the upside and minimizing the downside in this type of sale are:
Understand the investors skills and experience: Ensure their background and added value align with how you plan to grow the business.
Confirm the track record: Speak with owners of companies the investor has already purchase.
Seek Industry Experience: Target investors who have purchased at least one company in the HVAC industry or similar industry.
Scrutinize growth plans and fees: The growth plans need to be based on conservative estimates and sound strategies, and the management fees should not overly burden the business.
There are thousands and thousands of investors in the market and if you think a partial sale might be a good option for you, be patient and thorough in your search for the right investor. The foundations of a productive partnership are strong alignment of skills with goals, sensible financial projections, and a successful and relevant investment track record.