The entrepreneurial model of starting, building and then selling a company is the traditional path to wealth for many business owners. A much more creative approach is to achieve multiple "equity events" by selling your company in stages. Not only does selling in pieces - or selling more than once - provide more economic benefit, it can offer an earlier path to personal financial independence. Consider three ways to do this.
Sell Part of Your "Magic"
Almost any successful company has developed its own "magic" - intellectual property that helps it succeed. Intellectual property can be a proprietary system, software, technology or other operating methodology. Perhaps you have developed innovative software specific to your company that would be valuable to another company.
An innovative way to generate an equity infusion, or set yourself up for a bigger payday in the future, is to sell or license that software in a nonthreatening way, i.e., to a noncompeting company. The proceeds from such a transaction could be a lump sum equity infusion or a long-term revenue stream that allows your company to become more profitable and improve your value.
For example, a client of ours was a literature fulfillment company. The company developed an on-line technology to provide their clients with real-time transit information. This technology was subsequently offered to an archival storage company. The technology provided the storage company with a competitive edge and they bought it for a value in the millions.
Sell Underperforming Divisions or Products
Most companies at some point will find they have divisions or products that are not contributing to company objectives. These product lines or divisions become "orphans," usually as a result of changes in core business strategies.
These often consume an inordinate amount of management time and talent. Yet they may have considerable value to another company whose core alignment is a better fit. A recent example illustrates this phenomenon perfectly. When WD-40 Company acquired HPD Holdings Corporation (dba Global Household Brands) in 2000, the deal included a manufacturing operation. WD-40 Company had no interest in owning and operating a manufacturing facility. To a pure brand management company, it was considered a distraction. WD-40 Company ended up selling the manufacturing operation to another company that could flourish with the additional capacity. And it thereby monetized what otherwise could have been a problematic distraction.
This can also work when the pieces of a company are not working in harmony. For example, we worked with a pharmaceutical company where the sum of the parts was worth more than the whole. The company sold one division for far more than it would have realized had that division been part of a whole-company transaction.
Sell Part Now, Part Later
The third approach - selling part of the company now and the rest later - has two huge upside potentials. You can raise capital for expansion, and/or personally take some money off the table. In either case, it sometimes generates a higher overall benefit than if you sold the company in a single transaction.
Let's say you love what you are doing, but your retirement assets and your family's wealth are tied up in the value of your business. Selling part of the company to take money off the table, but remaining with the business may be an ideal solution.
You wind up securing your family's future, and you may even restore the entrepreneurial attitude you had when you started the business. When all your wealth is locked up in the business, you tend to be overly cautious. If you have diversified your wealth, you may again feel freer to take entrepreneurial risks to grow the business.
You may also make a lot more money by selling part of the
business now for a certain price and the balance later for two
or three times that value. Here is how that works, as shown
in the illustration.
Let's say your company is worth $25 million and you find a
strategic corporate investor to invest $20 million. The
investor infuses $5 million in the business and buys $15
million worth of your stock. You use the $15 million to
provide life-time financial security for yourself and your
Now you have a remaining invested value in your company
of $10 million, which is one-third of a $30 million company.
Your company has $5 million in new cash, and a strategic
partner that is providing numerous synergies and
competitive advantages. Your annual growth rate improves
from 7.5% to 20%. Five years later, the company is worth $75
million instead of the $35 million it might have been worth
had you not made that deal. Your second payday occurs as
you sell the balance of your interest for $25 million and add
this to the nest egg you established five years earlier. Instead
of cashing out once for $35 million, you cash out twice for a
total of $40 million and, for the past five years, you and your family have had financial peace-of-mind.
The examples show that multiple transactions are not only possible, but are likely to offer you more options, more personal satisfaction and more wealth than a single transaction.
Two Bites of the Apple
Sell Your Company More Than Once