Can You Sell Part of (or Stake In) Your Business?
Selling your business needn’t be an all-or-nothing proposition. Depending on your goals, it might be a good idea to sell part of your business—or a stake in it—while retaining control of the rest.
Why Sell Part of Your Business?
Maybe you’re starting to think about retirement and you’re reluctant to make a wholesale exit from a business that’s been your life’s work. Or maybe you’ve taken on a product line that doesn’t work with your core business and you don’t feel equipped to manage it. You don’t necessarily have to sell your entire business to solve problems like these.
Divestiture—the term for selling a part of a business—can be a good option when:
- You’ve added product or service lines or operations that are not meshing well with your core business or require skill sets you don’t have.
- You need funds to pursue new opportunities or invest in building the part of the business you want to retain.
- You want cash to pay off debt.
- You’re spread too thin and want to free up time and energy to focus on what you do best.
- You want access to additional expertise or resources like intellectual property to grow your business.
- All your money is tied up in your business, and you want liquidity for personal expenses.
Advantages of Selling Part of Your Business
In some cases, business owners choose to sell a part of their business when a segment is underperforming or they need cash for personal reasons. But selling a part of your business can also help to grow the business and get higher returns when you decide to make a full exit.
Here are some advantages of selling a part of a business:
Getting Access to a Different or Larger Buyer Pool
Some buyers have specific criteria for mergers and acquisitions, and they won’t consider buying a business that doesn’t exactly meet those criteria.
For example, if you’ve expanded your brick-and-mortar retail operation into e-commerce, you might find that buyers aren’t interested in acquiring both channels, and you’ll attract more potential buyers by selling off either your brick-and-mortar locations or your e-commerce operation.
These buyer types, called strategic buyers, might also be willing to pay more for the business because they’ll usually get immediate benefits from merging the business into their own.
Reducing Risk or Cutting Your Losses
If a part of your business, product, or service line is underperforming, divesting it can reduce risks to your bottom line. If a part of your business isn’t performing at all, you can cut your losses without impacting the other part of your business.
Keeping Control Over Your Business
As a small business owner, you might not be ready to walk away from your business, and selling a part of it allows you to remain involved while preparing you financially and emotionally for the big move.
Likewise, when your succession plan involves family members or key employees who aren’t yet ready to take over the business, selling a part of the business to a third party can give you bandwidth and time to train and develop your successors.
Getting Assistance for Growing Your Business
By selling a percentage of a business to a buyer with know-how or resources, business owners can get ready access to skills, intellectual property, or operational expertise they don’t otherwise have to help the business grow.
How to Execute a Partial Sale of Your Business
You can sell a portion of your business in two ways:
- Sell a division, unit, product line, or category. When the portion of the business you wish to divest operates as a separate entity, you can sell it in an asset or a stock (also called equity) sale. In an asset sale, you sell off contents of the business, such as furnishings or inventory. In a stock sale, you sell shares, or equity, in the company.
- Sell a percentage ownership of your business. You can sell a stake between 10% and 90% in your company, however this type of sale will not allow you to divest a business unit or category. The new owner would own a percentage of the entire business and you would own the rest.
Entrepreneurs typically choose to sell a percentage ownership when they want to raise funds, need liquidity, or they want to acquire skills or other resources, like intellectual property that a buyer can provide.
Selling a percentage ownership, called a recapitalization, gives business owners the option to exit the company in two (and sometimes more) stages. The buyer gets some cash from a partial sale immediately, and another payout when a full sale of the business takes place.
Operational Issues That Impact a Partial Sale
If the business you want to divest is a separate business entity (such as a limited liability company), you should be able to sell it as you would if you were selling the entire business—bearing in mind that some states impose rules for selling a business based on the way it’s structured.
When the operations, recordkeeping, and staffing of the portion of the business you want to sell are combined with the part you want to keep, you’ll have some work ahead of you. You’ll have to turn this type of business segment into a standalone operation to prepare it for sale.
If your business is one entity with two segments, start as early as possible to make it a standalone operation. You should:
- Establish separate accounting for cash flow, P&L, expenses and other business metrics independent of the rest of the business
- Create a separate website
- Assign dedicated employees, and
- Establish a dedicated contact and phone number.
Keep in mind too, that if your business is one entity with two segments, you won’t be able to use a stock sale, and asset sales are often less beneficial for the seller.
In an asset sale, the buyer can choose to purchase all or some of the assets, and liabilities and debts are usually excluded. As a seller, you’ll also be subject to less favorable tax treatment with an asset sale than you would with a stock sale.
How Your Business Entity Type Affects Your Business Sale
Your business structure also plays a role in determining whether you are able to sell a part of your company and how you’ll be able to do it.
- Sole proprietorships and partnerships. Sole proprietorships and general partnerships are owned by individuals, so there are no stock shares to sell. As a result, you would not be able to structure an equity sale, and you’ll have to use an asset sale to sell the portion of the business you wish to divest.
- Limited liability companies (LLCs). A single-member LLC can either sell the entire business or sell its assets.If your business entity is a multi-member LLC, you’ll be able to sell only a percentage stake in the company. Each owner or member of the LLC holds a percentage interest in the company, and adding a new member requires that the other members all agree to decrease their share of the business.
- Corporations. Corporations can sell a portion of the business through an asset sale or a stock sale.
Does My Spin-off Need Assets Like a Name or a Lease?
The type and number of assets you are selling affects the purchase price. A business name with customer recognition and a lease with favorable terms will usually help you command a higher selling price. But typically, you can still sell a spin-off that doesn’t have its own business name or a lease that can be transferred to a new owner.
Determining a Purchase Price in a Partial Sale
If the portion of the business you wish to divest is a discrete business entity, as discussed earlier, establishing a selling price for it won’t be much different from setting a valuation for the entire company. You’ll be able to assign a multiple to seller’s discretionary earnings (SDE) or EBITDA (earnings before interest, taxes, depreciation, and amortization) to arrive at an asking price.
However, if the expenses of the part of the business you are selling are combined with those of the whole company, you’ll have to create a pro forma income statement using assumptions for fixed expenses like real estate (rent), wages, and insurance costs.
Potential buyers might argue that the expenses you assign to the business are higher than your estimates and profits, therefore, are lower than your estimates. With this difference of opinion over the company’s value, negotiating a selling price is likely to be tougher.
Legal Considerations in a Partial Sale
One of the most important considerations when selling a percentage stake in a company is how much control the new owner will have. Typically, an owner with 50% or more of a company’s voting stock will have a controlling interest, giving them at least an equal say in decision-making. But a buyer with less than 50% of the business might also negotiate rights to participate in business decisions.
To protect your legal rights, you’ll want to make sure you document the sale and include all the provisions you and the buyer have agreed to.
Documents you and the buyer should sign, depending on the sale provisions negotiated, include:
- Purchase and sale agreement with details of the transaction
- Non-disclosure agreement to prevent a buyer from sharing information gathered during due diligence
- Non-compete agreement that protects the seller’s and buyer’s rights after the sale
- Employment agreements for the seller and employees that the new buyer retains.
You’ll also need a revised operating agreement that reflects the new owner’s percentage shares and any agreed-upon operating provisions if you are selling a stake in your LLC.
When the entity you are selling is a corporation, you’ll also need revised articles of incorporation that detail the new stock distribution and owners’ rights.
Advisors can help you in assessing the value of your business and its various parts, whether you choose to sell it in part or as a whole. Discover what your business is worth with BizBuySell’s valuation tools or with the help of a business broker. Determining the value of your business and its assets is key when deciding the next steps of your business sale process.