Selling a business doesn’t have to be an all-or-nothing proposition. I’ve worked with a few owners of mid-sized companies where we facilitated an approach from private equity firms that offered a deal that included “a second bite of the apple.” Here’s what that means.
Private equity firms represent investment partnerships that purchase companies, usually for the purpose of growing them and selling eventually. They have capital to invest but don’t always have the specific industry expertise to run the company. They put together deals that give them majority ownership of the business but ask the seller to retain a minority equity position ( often between 10 and 20% of the company’s value.)
The seller stays on to run the company so employees, customers, and vendors have stability and continuity. The owner avoids burnout by getting back to the part of the business they love, leaving the pressure of ownership and running the back-office operations to the PE firm. The company receives an infusion of capital that spurs growth – sometimes exponential growth – over the next few years.
For the right owner, this is a great opportunity. They may be too young to retire but unsure what they’d like to do next. They may still have a passion for their business but want to reduce risk, or may not want to make the capital investment to grow it to the next level. This agreement gives them time to think while they watch their company grow. They’ve been paid a portion for the sale, so they have the resources to invest and build their retirement nest egg. They also pay less in capital gains tax on the sale.
They usually receive a similar compensation they made as the owner, so they’re making a good living while they’re watching their company gain value. They could have worked on growing it themselves over time, of course, but they’d also have taken on all the risk and debt.
Generally speaking, this kind of deal is a win/win for both parties. The PE firm gets the benefit of the owner’s involvement, not only to keep operations running smoothly, but also to keep them actively invested in the company’s success. When the PE firm sells the business, the previous owner gets another 20% of the profit from the sale – of a much larger company. Hence, the “second bite of the apple” phrasing.
There is some downside for a seller to consider before signing the agreement. They’re no longer the boss making all the decisions. They’ll be answering to a board whose focus is on cutting costs, increasing profitability, and rapid growth. The PE firm doesn’t have an emotional attachment to the industry, the company, or its history. It’s not always an easy transition for a seller, or for employees when the new ownership makes changes they may not agree with.
It’s important for a seller to think long and hard about their own temperament, their willingness to become an employee instead of the boss, and their relationship with risk. If they can accept the terms and work comfortably with the new management team, the payoff can make it very much worthwhile.
Bianca Evans
Bianca Evans is an experienced business broker based in Jacksonville, Florida. She is a top producer in her field and has completed over 200 transactions since 2006. She is a Certified Business Intermediary (CBI), a Certified M&A Professional (CM & AP), a Board Certified Intermediary (BCI), and has her B.S. degree from the University of Florida.
In her 18 years of experience, she has sold businesses in manufacturing, wholesale/distribution, service, retail, restaurants, professional offices, and more.