Should I Sell Part of My Business to an Investor?

By Emery Ellinger

“There is so much cash on the sidelines,” you may have heard on CNBC, The Wall Street Journal, and elsewhere. Many people do not believe there is much cash waiting to be deployed, but in fact, there is. The amount of cash that companies and investment funds have is staggering.

Let’s look at some of the facts. There are over 400 million dollars in Private Equity companies in the United States. That gives the Private Equity firms over 1.2 trillion dollars’ worth of buying power, since they use debt too. Corporations have over 3 trillion dollars in cash on their corporate balance sheets. As a result, these funds and corporations are becoming more aggressive in finding businesses to purchase since they need a return on their investment.

So with that much cash on the sidelines, how can you take advantage of this opportunity?

Of course, you do not have to do anything; you may choose to stay the course. However, many business owners are looking for new strategies to grow their businesses. CEOs are looking for investment or bank debt to fund their business growth plans. So this is where an investor or private equity firm may come into play. These investors can help fund this growth plan and share in the upside with you.

We have worked with numerous business owners that have big enough businesses to attract a private equity investor.

A private equity firm is, by definition, a firm set up to invest equity into private businesses. Because of the amount of capital the private equity groups generally have, they want to invest larger amounts of money into stable and growing companies.

So let’s say that your business is worth 10 million dollars. The private equity group makes an offer to buy 60% of your company for 6 million dollars, and you keep 40% of the company. You can continue to run the business, and now you have a capital partner backing you. Not to mention, you get 6 million dollars less any transaction fees and payoff of debts.

The idea is to grow your company, and one day you and your new partner can sell the company for a much larger number. So if you sell the business later for 50 million dollars and you own 40 % of the company, then you make another 20 million plus the 6 million you made on the first partial sale of the business.

The key is finding the right capital partner that will not only provide capital, but also help you strategically grow the company. Private equity groups can help you expand locations, buy additional companies within your industry, and hire senior staff members. The goal is to make the company larger and more profitable.

That being said, there are potential downfalls. One is the possible loss of control. Many funds will look at minority investments, but most of them want majority control. So you may still be the President and running the day-to-day activities, but legally, they have control. This issue seems to be one of the biggest reasons I see owners decide not to move forward. So before you embark on the process of finding the right partner, please make sure you are ready to have a new partner.

Another big risk is that you may not get along with your new capital partner, and you could either be unhappy or get fired. These are simply some of the risks you must be willing to take when utilizing a strategy like this one.

If you have the right partner and the right plan, and you execute it well, everything could work out fine. If you don’t have the right partner, the right plan or proper implementation, then this strategy will be challenging.

You may have heard the phrase “OPM” in regards to using “Other People’s Money.” Many millionaires and billionaires have used other people’s money to make a fortune, and you can, too!

About the Author
Emery Ellinger is Chief Executive Officer of Aberdeen Advisors, Inc. Aberdeen Advisors is a team of highly successful business brokers that assist business owners in selling their businesses. Emery has directed over 40 mergers, acquisitions and financing transactions. Emery was the #1 Business Broker in the Southeast for Business Brokers Network, America’s Largest Network of Business Brokers, over the past three years.