Should you sell business goodwill?
If it makes financial sense and you understand the dilution aspect of selling equity and the potential interference from investors, then yes, go ahead. It’s a common enough practice.
People sell business ownership for a variety of reasons:
- Needing capital to actually start the company;
- Swapping equity for additional capital to grow the business;
- Sourcing money to pay down existing liabilities and debts;
- Raising venture capital to expand into new markets and;
- Desiring to diversify their own business risk as the sole owner.
Whatever your motives for giving up part ownership in your company, there are things M&A brokers want you to be aware of.
In this post, we’re going to address what these are, some of the challenges to expect, how to sell the equity, and who to sell it to. But first, here’s a look at the pros and cons of the practice.
Selling equity – the good, the bad, the ugly
One of the biggest advantages of raising capital via the selling of equity is that, unlike debt, the business owner isn’t weighed down with payback quotas and inflated interest rates. Another favorable argument for giving up equity is that again unlike debt, the money received isn’t secured by business assets.
However, with that said, most of today’s investors aren’t content with just being silent partners. They do expect to be involved in the daily operations. Some will even contest for equal standing with you and negotiate board positions where they have the power to vote.
If you enjoy being a solo entrepreneur, then selling business equity may not be the right path for you. That’s mainly to do with the fact that your equity partners are your business co-owners. What does this mean practically?
- They can scrutinize company books, records, and financial statements.
- They have a say over profits and company ownership.
- They can veto operational decisions and,
- They can vote to have you removed as head of the business!
With this background in mind, who should you sell equity to?
Who to sell your business equity to
When it comes to selling business equity you need to keep two things in mind:
Who you’re selling to and how much equity you’re prepared to give up.
Equity partners can be family members, startup colleagues, venture capitalists, or angel investors.
It’s worth mentioning that selling equity doesn’t necessarily entail receiving capital investment. It can also mean the investment of time and skills.
A good case study of why it’s essential to be mindful of who you sell to and the equity you give up can be seen in the following story:
In 2006 Greg Alexander founded Sales Benchmark Index (SBI) a growth advisory firm. He gave two of his employees a 25% stake each in the company. Fast forward 10 years, the business was worth $162 million. However, because of his disastrously generous equity offer at the onset, his two employees walked away with nearly half the money – a cool $80 million – when the company was eventually sold to New York-based private equity firm CIP Capital.
The point of the story is to be careful who you sell to and how much equity you give away.
This brings us to the next issue – the process of selling business goodwill.
How to sell your business equity
First things first, you’ve got to get the business up to a respectable state. Fix whatever needs fixing before presenting your business to investors. For example, get your financial records in order and have a business valuation done through an independent consultant.
An experienced broker is able to facilitate the preparation needed and position your business as an attractive investment.
Furthermore, a broker will be able to help you solicit interest from various avenues. Ultimately you’ll likely be opting for one of the following:
- Going public with your sale through a public listing (an expensive and highly demanding process but whose tradeoff is the ability to raise colossal amounts of capital)
- Peddling to big private investors (enter venture capitalists and angel investors)
- Selling to lesser-known investors (private business owners you may know already)
- Selling within to employees (an excellent way to boost employee loyalty)
If you’re interested in selling business goodwill, it’s always a good idea to consult with a seasoned broker. Here at Sun Acquisitions, our team is ready to help you map a way forward.
Looking for more insight on selling a business? Check out these links:
- Where to Sell a Business
- When to Sell a Business
- How to Sell a Business Privately?
- What Documents are Needed to Sell a Business?
- Sell NOW – The Crystal Ball is Pretty Clear
Disclaimer: Any information provided in this blog is not intended to replace legal, financial, or taxation advice given by qualified professionals.