There are times where it is not worth selling the whole company. This can be done through an Owners Buy-Out (OBO). There have been many cases where only selling a minority share has led to the company owner getting more money than he would have got selling the majority share.
It is also an interesting transaction for private equity firms. Investors usually prefer the company owner to remain linked to the company after the sale, as it will give him a financial incentive to help the transition and reach sales and profit objectives that were set before the deal was closed.
We once closed a deal with a 62 year old business owner who knew he was nearing retirement. We decided that the best option was to look for a financial investor to buy the company. As our client was willing to stay in the company for a few more years, we built the following structure: a NEWCO was created so that we could sell the company to the NEWCO for 12 million Dollars.
Our client had 33.3% in the NEWCO and the private equity firm had 66.6%. The NEWCO asked the bank to finance 50%. This way, the owner, from the 12 million he received, invested 2 million into the NEWCO. The NEWCO bought 100% of the company and he, receiving 12 million Dollars for 100%, got 33.3% of the NEWCO for 2 million Dollars.
In that jurisdiction, the company’s shareholders had a tax advantage meaning that they hardly had to pay any taxes. However, the longer it took to sell, the more taxes they would have to pay, so our client made the most of the opportunity and sold 100%.
At the same time, by acquiring 33% of the NEWCO, he was able to keep managing his old company and, after 4 years, retire and sell the NEWCO, along with the private equity firm, to new buyers.
With this structure, it doesn’t always matter if the business owner stays or not. If he trusts the management team and the business plan then that is enough. This trust also calms the financial investors.
Book: How to Maximize the price of my company