When it comes to selling a business, many entrepreneurs think they have no choice but to part ways completely with the company they built. However, that’s not always the case. You can sell your business and stay as the owner — at least partially. This can be achieved through an Owner Buy-Out (OBO), a strategic transaction that offers business owners the opportunity to retain an interest in their company, even after selling a portion to outside investors.
What is an Owner Buy-Out (OBO)?
An Owner Buy-Out (OBO) allows a business owner to sell part of their ownership in the company while retaining a stake. This means the owner does not have to completely exit the business. In many cases, business owners who are nearing retirement or looking to diversify their assets may find this approach beneficial, as it allows them to realize a financial gain from selling a minority share without losing control of the company entirely.
Why Choose an Owner Buy-Out?
There are several reasons why an OBO can be a smart decision for a business owner:
- Flexibility in Exit Strategy: An OBO provides business owners with the flexibility to sell only part of their business. This can be especially useful when full exit may not align with the owner’s goals, such as retirement or achieving certain financial objectives.
- Higher Value from Selling a Minority Share: There have been instances where selling a minority share has actually resulted in a higher financial return for the business owner than selling a majority stake. This is because selling a minority stake might come with fewer risks, a more flexible deal structure, and the potential to benefit from future growth.
- Continued Involvement: In many cases, business owners prefer to stay involved with their company after selling part of it. This allows them to continue guiding the business, contribute to its long-term strategy, and ensure the vision they created is carried forward. It can also be beneficial to private equity firms or other investors, who often prefer to keep the original owner in the business for continuity and to meet agreed-upon objectives.
How an Owner Buy-Out Works
An OBO can be structured in many ways, but a typical deal might involve creating a NEWCO (New Company) to facilitate the transaction. For example, let’s look at a real case where we facilitated an OBO for a 62-year-old business owner who was approaching retirement.
- Transaction Setup: A NEWCO was created, and the existing business was sold to the NEWCO for $12 million.
- Ownership Split: The business owner retained a 33.3% share in the NEWCO, while a private equity firm acquired 66.6%.
- Financing: The NEWCO took out a bank loan to finance 50% of the transaction, making the deal more manageable and enabling the owner to stay invested in the business.
- Investment: From the $12 million received, the owner invested $2 million back into the NEWCO, securing his 33.3% stake in the new structure.
In this arrangement, the business owner received 12 million dollars for the sale of the company, but by acquiring a 33.3% stake in the NEWCO for just $2 million, he retained a substantial ownership position, allowing him to remain involved in the management of the company.
Tax Benefits of an Owner Buy-Out
One of the key advantages of structuring a sale as an OBO is the potential tax benefits. In some jurisdictions, company shareholders can benefit from favorable tax treatment on capital gains, which makes selling a minority stake more financially attractive than a full exit. The longer the business owner delays the sale, the higher the tax burden they may face, so timing is crucial in maximizing the financial benefits of an OBO.
The Role of Private Equity Firms in OBOs
Private equity firms are often very interested in OBOs because they can leverage the expertise and continued involvement of the original business owner. When business owners stay on board after selling part of their business, it provides an incentive for them to help drive the company’s transition and reach pre-established sales and profit targets. Investors know that the ongoing involvement of the original owner can significantly reduce the risk of the investment.
For the business owner, the support of a private equity firm can provide access to capital, management expertise, and resources that can fuel future growth. Over time, the business owner can either sell their remaining stake in the NEWCO or retire, knowing that they’ve secured their financial future while ensuring the business remains in capable hands.
Benefits for Financial Investors
For financial investors, an OBO presents a valuable opportunity to acquire a business with a high level of continuity and commitment. The trust between the business owner, the management team, and the investors is crucial. Investors are more likely to invest in a business if they trust the existing management team and believe that the owner will continue to drive the company’s success in the coming years.
In summary, an Owner Buy-Out is an excellent option for business owners who want to maintain some level of involvement in their company after a partial sale. By selling a minority share, owners can secure liquidity, minimize taxes, and still benefit from the future growth of the company. Private equity firms are also attracted to OBOs because of the financial incentives for the business owner to remain involved and help drive the company’s success.
You Can Sell Your Business and Stay as Owner
Selling a business doesn’t always mean walking away entirely. With an Owner Buy-Out, you can sell your business and stay as the owner—or at least as part-owner—while continuing to guide its future. Whether you’re looking to retire gradually, retain control, or partner with private equity for future growth, an OBO offers a strategic solution that benefits both the business owner and the investors involved.
If you’re considering selling your business but don’t want to completely exit, an OBO might be the perfect solution. It allows you to realize immediate financial gains, maintain an ownership stake, and remain active in the company, ensuring that your business continues to thrive even after the sale. Contact an expert in mergers and acquisitions today to explore if an Owner Buy-Out is the right path for your business.
By carefully structuring the deal, you can achieve a win-win scenario for both you and your investors, securing your financial future while still having a say in the direction of the business you worked so hard to build.
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This article was written by Enrique Quemada, Chairman of ONEtoONE Corporate Finance Group.
