Sometimes a business owner isn’t interested in selling his/her entire business, but for various reasons is open to selling a portion. While a lot of the rules and processes for a regular “entire” business transaction remain the same, a few key aspects are unique to a partial business purchase and we’ll examine them in this article.
Why Buy Part of a Business?
There are reasons for both buyers and sellers to buy part of a business.
- Need financing (they haven’t cultivated a good relationship with a banker or don’t qualify for alternative financing)
- Want a strategic partner (they need your area of expertise in the business and are having difficulties hiring for it)
- Want a graduated exit plan (they consider the best way to sell their business is to someone slowly, over time)
- Want a de-risked entry into a business (they like the “try before you buy” aspect of buying a portion of a business)
- Want to learn a business before buying it in full (a more technical or complicated business might require a bit more of a learning curve)
- Not have the means to buy the entire business (even with seller financing the entire purchase price may be slightly out of reach)
How to Buy Part of a Business
When buying part of a business you’re going to go through the same LOI or Offer to Purchase process. The first difference will be in the amount of the business you are buying. Instead of buying the entire business, you will be buying a specified portion, usually in the form of stock in the seller’s company.
The two most important aspects of the document buyer and seller will sign are the buyout clause and the rights of the buyer.
When only buying part of a business you must spell out the conditions by which you may purchase the rest of the business or by which you may sell the portion of the business you already own. You will likely have used a valuation process to determine the share of the business you are currently buying. Will that same valuation process be used at the time of the next purchase? What timeline will be used to buy the rest of the company? What flexibility will be incorporated into the timeline?
Rights of the Buyer
This aspect will be primarily determined by the reason(s) the seller has agreed to sell a portion of the business to you. Were you brought on just as a financial partner, essentially silent? In that case, you might only have rights to see financials at certain times of the year. Were you brought on as a true business partner, with decision making power? If so, how is that decision making power spelled out in relation to your ownership share? Be as detailed and explicit as possible, covering every scenario you can imagine.
Buying part of a business can be a great opportunity to buy into a business with a lower upfront cost of capital while delivering an “on the job” learning experience to help you be a very strong owner when you do take over the business. But this can only happen if you’ve spelled out your role and your rights in the transaction document. Needless to say, this isn’t something you should take on your own. A broker (cough cough) can help you stay objective and focus on what you want and what is possible, making sure the two meet on the dotted line.
We don’t often sell parts of businesses, but if this is a scenario you are contemplating, we have the expertise to assist. Give us a call!