Making the decision to sell a business isn’t always easy, especially if you have spent the majority of your life and career putting your heart and soul into your business. But there comes a time in every entrepreneur’s life when a business transition becomes a necessity. Entrepreneurs and business owners consider selling their businesses for several reasons, such as for a career change, retirement, to make other investments or simply because it’s “just time”.
However, even if it is the right time to sell, entrepreneurs often feel some apprehension, anxiety, and/or hesitation about letting go for good. Rather than letting go of the business completely, some may consider selling a portion of the business (which could include a minority or majority recap).
M&A is not “all or nothing” –The good news is selling a business doesn’t have to be an “all or nothing” situation, but it is a wise business decision to only sell a portion? What are the risks involved in this decision?
Business owners or executives decide to sell a portion of the business for several reasons. This process is also known as a divestiture. A divestiture is a strategy that arises when an executive or business owner decides that he or she no longer wants to operate a particular business unit or asset.
Here are some common reasons why a business owner or a management team would consider a divestiture strategy:
As a business owner or entrepreneur, if you are considering retirement or getting out of the game, you don’t need to sell your entire company to do so. With solid and proper strategic planning, you can effectively sell a portion of your company, allowing you to generate additional funds for retirement or provide you with sufficient capital to invest in other areas of your existing business divisions or even make other investments.
In summary, you have two primary options in selling a portion of your business:
Although there is a significant amount of risk involved, many business owners find that all of their wealth and assets are tied up in their companies. Therefore, selling a portion of the company allows business owners to liquidate some of their assets while also still remaining active and in control of company operations. It also allows business owners and executives to focus their talents on a division that has the greatest value and potential.
Let’s look at an example of a successful, well-known company that executed a successful divestiture strategy. Jack Welch, CEO of General Electric was well-known for his divestiture strategies, strategically using them to “prune” the company in some areas while boosting growth in others.
In Welch’s first four years as GE’s CEO, he divested over a hundred business units accounting for about 20 percent of GE’s total assets. Although this strategy involved eliminating more than 100,000 jobs, which meant lost jobs and forced retirements, GE’s revenue grew significantly from $26.8 billion to $130 billion.
In another example, many retail stores today struggle to compete with online shopping. As a result, many have closed various retail locations in strip malls and other plazas in order to focus more on building their online growth strategy to boost eCommerce sales. Many have also split the business into two divisions, an online business and a retail division, making the company easier to sell. This strategy appeals to buyers that have a preference for online-based businesses and also to buyers that have a preference for retail businesses, positioning the company to have the best of both worlds.
Selling a Portion of a Business Might Mean Selling a Product.
Many companies expand their existing product lines by investing in the development of a new product as a part of their overall growth strategy. However, in many cases, businesses often later regret these decisions. The product may not fit in with the overall operations or may make the business owner lose focus on the core business. Regardless of the case, selling that particular product just make sense.
A Majority or Minority Sellout or Divestiture is Not a Bad Strategy
As we have discussed here, it can be a wise move for business owners to sell a portion of their company. Business owners and executives sell portions of their companies for numerous reasons. Making the decision to sell a portion of a business doesn’t always mean failure. When planned and executed properly (typically using an experienced investment banker), businesses can reap the financial benefits of selling a portion of the business. Even small businesses can benefit from splitting up their company into separate divisions and selling them as individual entities.
How do you know if it’s best to sell a business as a whole or only a portion or specific business unit? This ultimately depends on a number of factors, such as the amount of stake you want in the future of the company, the value of the company as a whole and the value of individual business units or entities and what makes the best financial sense from an ROI perspective. Working with a professional can help you consider your options and help you take the best course of action for you and your business.
Remember that selling a portion of your business doesn’t have to mean giving up or letting go completely. In many cases, it can be a better option for the business owner looking to de-risk with a little “bird in hand” liquidity while still navigating the ship into future growth.