How to Buy Part of a Business

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How to buy part of a business.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.

Sellers may:

  • 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)

Buyers may:

  • 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.

Buyout Clause

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.

Final Thoughts

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!

Podcast Episode 5 – What is my Business Worth?

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Case Study #59: Still Working for the New Owners

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New OwnersAnthony Fracchia was born into a restaurant business and started working at the age of 10.  He wasn’t allergic to working with family and years later when he was in the working world he decided to get involved with what was then primarily a health insurance brokerage with his father.  He eventually bought his father out, worked hard on building the company’s revenue, and a few years after that, sold the business, Altrius Benefit Consultants, for 8X EBITDA.  The funny thing?  Both he and his dad are still working there to this day!  They love the team and business they built.

The Model

Many might be familiar with the regular individual insurance agent who gets paid straight commissions set by a carrier.  An agency is a way to accelerate the work of an agent by adding more team members.  But a general agency is one step above even that, as they negotiate their own commissions based on the volume they do, and hence can, in a sense, wholesale those rates by offering training and support and keeping the difference.  At the time of sale Altrius had 300 agents in this revenue channel in one state alone, apart from the regular residual income that accrues from premium payments across policies.

The Buyout

Anthony loved working with his dad but after more than a decade of working together they realized they weren’t aligned in their business goals.  Anthony was in his 30s and wanted to grow aggressively, and his father was in his 70s and wasn’t at all interested in that aggressive growth.  Anthony and his father had always kept their own personal books of business outside of the agency’s valuation and those personal books accounted for 70% of the revenue of the business at the time.  Anthony bought his father’s share of the remaining 30% of revenue for 2X topline revenue.  Dad continued to work on the business and Anthony hired a business coach and went for it. 

The results spoke for themselves.  In the four years after buying the business from his father Anthony increased:

  • Gross revenue by 85%
  • Gross profit by 100%
  • EBITDA by 600%

The Sale

Years before, when he still co-owned the agency with his father, some state legislation was proposed that could have decreased the agency’s earnings by 40-60%.  Father and son realized that their business wasn’t diversified enough and added Medicare and other employee benefits to their overall portfolio, but that concern about a changing regulatory environment was still there, and only became exacerbated with the passage of the Affordable Care Act.  The regulation in the industry wore on Anthony.

He had also seen the acquisition market in insurance agencies heat up from 3-4X at the time he bought out his father to 8-10X some years later.  When he started to get some cold calls inquiring about his business he thought it was time to think about some general principles for a sale.  He came up with four non-negotiables:

  • He wanted to keep the brand intact
  • He wanted the ability to stay on indefinitely
  • He wanted his staff to be safe to stay on indefinitely
  • He wanted a multiple of EBITDA between 7-10X

Part of how he came up with these points was one particular tire kicker who had taken him down the road for a couple months.  Anthony was naive and, excited that someone wanted to buy his business, thought he was just “having a conversation” but in reality he was giving away a lot of information.  At some point before handing over some revenue numbers he realized the acquirer just wanted to buy his book of business and planned to zap his brand and fire his whole team.  Needless to say Anthony broke off the conversation right away and came up with the four points listed above.

Because he stayed focused on those points when the right acquirer came along and said, “No problem” to those four points he knew he was on a good path.  He ended up getting 8X EBITDA, 80% upfront and 20% on a three year earnout.  The 80% was 90% cash and 10% in unrestricted stock in the acquirer.  The earnout was all stock, delivered in annual tranches over three years.  The acquirer was originally listed on the OTCBB but has since transitioned to NASDAQ.

Lessons

As always, there are lots of lessons here but we will focus on four:

  • Have a buyout agreement when you have a business partnership!  This will ensure that any future separations will be clearly delineated.
  • Be clear on what it is you want out of a sale.  Taking the time to write down what you want can serve as a north star for every meeting you take.
  • Realize it’s very rarely “just a conversation” when someone is interested in buying a business.  Hiring a broker takes a lot of these time-consuming calls off your plate and puts them on ours, where they belong.
  • Hire a business coach.  No one achieves success in business alone.  Be humble enough to ask for help and smart enough to take the advice when it’s offered.

Are you anxious to supercharge the value of your current business so you can sell it in a few years?  We’d love to help you put those plans in place.  Give us a call.

Podcast Episode 4 – Is Selling the Right Move?

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4 Steps to Prep Your Business for Sale in 2022

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Prep Your Business for Sale in 2022Another year, another set of unusual conditions for the world and business.  But the fundamentals of buying and selling businesses have remained the same.  That doesn’t mean that sellers can’t focus on a few key spots to better prepare their businesses for sale.  Let’s look at them.

1. Monitor Market Conditions

We’re long past the “wait and see” time of early 2020.  Buyers are looking for new opportunities and they are most excited about businesses that continued to perform well throughout the last two years.  In addition, financing can still be had at very good rates (for the moment!).

Action item: Be in touch with your broker about market conditions in your segment and how quickly businesses like yours are selling.  More importantly, find out what were the 1-2 reasons why buyers ended up picking particular businesses and see if you can use those reasons to better position your business.

2. Think Virtual

The last two years have completely transformed our lives in almost every aspect of our lives:

  • Work & School: many employees moved to remote work situations and some schools had a hybrid of in-person and virtual learning
  • Food: from delivery and pick up of already-made food to delivery and pick up of groceries, businesses have bent over backwards to accommodate legal requirements and consumer desires
  • Religious services: many places of worship offered virtual services to account for the fact that their congregations were not able to be together in person

What has that meant for your business?  If you used to travel to visit vendors or clients, how have virtual meetings worked?  If you’ve had to offer contactless or distanced delivery of services to your clients, have they been as engaged or consistent in staying with you?  What new opportunities presented themselves in the new environment that Covid-19 presented?

Action item: Have a full report compiled on what you learned from the early days of Covid-19, what your business did to adapt, then how you measured those adaptations and continued to tweak for best results.

3. Plan Your Exit

We’ve said before that the overwhelming majority of successful sellers wait until their business is already on the market before doing their exit planning.  It’s never too soon to start your exit planning.

Exit planning isn’t just about when you want to exit and what you want to get for your business, but what happens next after a successful transaction.  It also isn’t something that just happens because you want it to: you need to have made sure your business is ready for your exit too.

Action item: Put together your exit plan.  Write down why you want to exit and when, and how much you would want for your business (based on a valuation, not your opinion).  If systems and personnel aren’t yet in place for your departure, how long would it take to put those in place?  Remember that the more the business is dependent on you for day-to-day operations, the less attractive it is for buyers.

4. Prep Due Diligence

One of the first places a transaction can get bogged down is in the due diligence phase.  Part of this is normal: there’s a lot of documentation that buyers want to go through and that simply takes time.  But the sheer number of documents can tire sellers, even motivated ones.  And the longer deals take to close, the likelier they are not to close at all.

Just as with exit planning, due diligence prep should be started before you list your business for sale.  Knowing that all the reports and paperwork are saved and ready to go for a buyer is not just a load of your mind, but it will give you, as a seller, a quiet confidence: your business is ready for sale.

Action item: Ask your business broker for a typical due diligence list for a business like yours.  Some basics you’re going to want to have include:

  • Business tax returns for at least the last three years
  • Internal accounting files for the last three years
  • Account Payable and Receivable aging reports
  • Detailed Inventory and Equipment Lists
  • Annual CapEx report
  • List of Insurance Policies
  • List of Required Licenses
  • Customer records, in as detailed a form as you have
  • Employee records
  • Employee Benefits
  • Vendor records, with recommendations as to whether relationships have been good, average, or should be switched 
  • Records of payables and receivables
  • Operations Manual and Employee Manual 
  • Organizational Structure with names and positions
  • Technology report: how well-developed is your website, social media presence, SEO, etc.
  • Pending changes and improvements: what purchases or changes are going to happen in the next 12 months regardless if the business is sold (e.g. website upgrade, equipment purchase, brand refresh) and why are those purchases or changes happening

We can’t do these action items for you, but we can certainly help.  Give us a call and let us know which of these you need help with.

Podcast Episode 3 – What Makes a Qualified Buyer

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This Year, Focus on the Essential

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PrioritiesOne of the drums we often beat in these articles is the importance of delegation but as a new year begins, it might be helpful to look at the question of delegation through the frame of what it costs a business owner not to delegate.

Where Do You Shine?

When starting a new business entrepreneurs wear dozens of hats, “chief janitor” almost always among them.  It’s an exciting time, and bootstrapping and being careful with spending in those early days pays off not just in cash flow but in knowing inside out the roles you hope to delegate.  But that delegation has to happen as soon as (or sometimes, even a little bit before) cash flow allows for it.  Because the key question is, “What’s your time worth?”

Whatever number you come up with, start going through the tasks you currently have on your plate and ask yourself if this task fits with the unique skill sets you bring to the table.  If not, the company is in all likelihood overpaying you.

The easy example is the “chief janitor” role.  Clearly there would be someone else who could handle such duties who doesn’t add the same value that the business owner does.

A more subtle example would be an email newsletter or a blog that a business owner refuses to delegate because he/she thinks no one else can do it.  But even if such business owners only value their time at $150/hour, and a writer charges $75/hour, the company is paying roughly double the market rate for these services.  Is it likely that the business owner writes twice as well as people who only write for a living?  No.  

Business owners have to be ruthless: every single task that takes up their time needs to be audited and held up to this scrutiny.  Don’t let the company overpay you for your services.  Stop with the chief janitor stuff, already.

Another Frame

One of the books we really love here at Apex is Marty Neumeier’s Zag. One of the points of a brand audit he proposes is to answer your company’s  “only _____ that _____.”  For example, “the only plumber that can be at your home in 90 minutes or less” or “the only sales coaching with a money back guarantee.”  You can apply that same frame to your task list.

Am I the best person at the company for _____ task?

Am I the only person at the company for _____ task?

If the answer to the first question is “Yes,” hopefully the task fits with your skill set, because it probably means that’s where your own company is getting its best value with you.

If the answer to the second question is also “Yes,” then this probably belongs on your list, unless that task is not an area in which you shine, in which case maybe it’s time to bring in someone who is better than you at that task.

When you start to realize that failing to delegate not just costs you time, but costs your company, and hence you, money, you might arrest the desire to put out every fire, fix every problem, and insist that only you can handle a task.  Business owners who don’t delegate don’t make their businesses attractive propositions for buyers, whose eyes can glaze over when these sellers list all of their daily and weekly tasks.  No thanks.  

Almost all entrepreneurs who have successfully exited their businesses have learned the lesson of delegation, and the sooner they learned it, the bigger their exit was.

Are you having problems delegating or identifying where you add the most value as a business owner?  We’d love to talk with you and help you figure that out!

Podcast Episode 2 – What Exactly is a Small Business?

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