How Selling A Minority Interest Or Part Of Your Business Can Put Money In Your Pocket And Relieve You Of Day To Day Responsibility.
Selling a minority interest in your business may appear to be a strange idea at first. Until you consider why you want to sell in the first place. Do you want a cash reward for all of your years of work, and the cash you have invested? Selling part of your business may get your cash back.
What else are you looking for? If you are like most people, you want freedom. You want to be able to do all those things you were unable to do in the past, but didn't because of time and responsibility. Selling part of your business may not appear to provide you with freedom. And you would be right if that was all there was to it.
Before getting to the next important condition that must be satisfied, let's qualify this entire topic. Selling a minority interest in your business is probably not your preferred choice. Nor should it be. Particularly if someone is ready, willing, and able to buy your entire business, at your price.
Selling a minority interest is way of partially achieving your objectives of cash and freedom. It is a strategy to consider if economic conditions prevent an outright sale, or prevent an outright sale at an acceptable price. And it is a strategy to consider when contemplating providing financing. It may be an alternative to owner financing.
Selling part of your business is a strategy to be considered when the prospective buyer has demonstrated ability to manage. To get the freedom that you are looking for, you need to know that he is prepared to manage the business, and that he has proven his capability to manage. And as an aside, someone who has been a personnel manager may be considered a manager, but still lack the kind of managerial skills needed to run your business.
You will need to bind the new part owner to a management contract/employee agreement. You will need legal advice to put in the necessary mutual protection clauses. You will also need a shareholders agreement appropriate to the situation. Selling a minority interest is not nearly as common as selling a business, so you need to be very sure of the person your business is taking on as managing partner.
This type of arrangement will work best when your new partner has an interest and motivation to purchase your remaining interest in the business. It also works best when the related shareholders agreement provides him a clear path to making the purchase, including an appropriate timetable.
You will also need to provide for what happens if he doesn't want to buy your remaining interest. At a minimum, you should have an option to buy his position for a known price. And if he doesn't already have something similar from you, be prepared to provide it. Either way, it will be possible to deal with an offer of purchase from a third party, whether solicited or unsolicited.
If this works out, what will you gain from the initial step? How will selling a minority position help you. Well, it will free up some cash. Cash that you can invest in something else, and diversify your portfolio. Cash that you can use to travel, to buy a boat, an airplane, cash to give your children or grandchildren. You probably won't need much help in finding homes for extra cash.
It will also provide you with freedom. You will be free from being available, or at least on call, twelve months of the year. You will have the time to explore all those exotic places you have always dreamed about. You will have the time to work on your golf game, if that's your passion. Or you may want to use your new freedom to get involved in that volunteer project you have been dreaming about for years. It may involve living for a time in some other country.
Some words of caution. We already discussed the need for the minority interest owner to be an effective manager. You also need to be sure that it is a minority shareholder that you take on. If you make the mistake of selling over 50% of your ownership, you could put yourself in the position of holding a minority interest in your own business. Each jurisdiction is different in the restrictions it places on the rights of minority shareholders. So be careful about that.
Selling a minority interest is a strategy where you will need good legal advice, and you will have to be careful to follow it carefully. That doesn't mean that you should let an attorney make your business decisions. It does mean that you must be a very attentive consumer of legal expertise. Understand the legal consequences of any proposed action, before you agree to it.
Because of the prospect of requiring considerable legal advice, be sure to get a lawyer with experience dealing with minority interests. Also because of the likely high legal costs, it probably makes sense to use this strategy only where your business has considerable value. You don't want to spend $50,000 on legal advice for a $250,000 transaction. You can likely find a more cost effective strategy.
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