How to Sell Part of Your Business
For business owners, a great way to retain their business but still get some liquid cash is through selling a part of the business. That’s right – selling a business doesn’t mean you have to sell it completely. You can always sell a portion of it while holding onto the rest. The cash can be used for further growth of operations or get some liquidity. Selling a part of your business might be a better option for you and the business, if you plan and execute the strategy well. Let’s start by exploring the use cases for selling a part of the business.
Why sell a part of your business?
Below are a few reasons why you might consider selling a part of your business
- Enable expansion
Certain divisions / business units which you want to grow might require capital to grow and a good way to raise this capital would be to sell a part of your business which is not your core operations.
Business owners generally put in a lot of their resources (cash and time) into their venture. Though the business might be running well, the entrepreneur has little (or no) cash liquidity. Selling a part of the business ensures that the entrepreneur retains control and runs the venture, while also getting cash for their personal use
- Strategic partnerships
An important reason to sell a part of the business is due to strategic opportunities that may arise. In general, it can be classified into 3 categories -
- Synergies that allow revenue growth
If you’re a restaurant owner, and you get an offer of partnering with a real estate developer who has space in a prime part of the city, you could work together to increase the revenue of your venture
- Synergies that help in cost reduction
If a large company purchases raw material, they’ll get a good discount on the price due to high volumes. By partnering with such a company, you can work out an arrangement where you source the same raw material through them and reduce your overall cost
- Access to intellectual capital
If an eminent personality with deep domain knowledge in your industry agrees to partner with you, you can grow your venture significantly by leveraging their network and knowledge
Some businesses, especially when there are multiple business lines, are difficult to run by one person itself and require committed focus by multiple individuals (Ex. A retail company with multiple outlets in different geographies). Such cases would require bringing on more partners to handle operations
Property management companies do great when the real estate market is slow as people prefer to rent homes. When the market picks up, real estate agencies and brokerages do well as people buy homes over renting them. A partnership between such companies helps them offset the risk during market slowdowns
A web based e-commerce platform which also operates offline stores might figure out that their website is much more profitable than their retail stores. Now, it’d make sense for them to sell their retail stores to another entity and focus on their web platform alone.
Apart from the above, there are other cases as well, such as retiring high cost debt, conflicting lines of business, etc which warrant a partial sale of a company.
Types of sale
It’s important to understand the types of partial sale possible and its implications
- Selling shares in the company
As a solo founder, you will probably own a large portion (or even 100%) of your business. You can sell a portion of the shares in your company to an oncoming investor (strategic or otherwise) in exchange for a capital infusion into the venture. The shares allocated to the investors would give them rights to the business (like access to company’s financial and product data, customer data, etc.) and a certain amount of decision making power.
The end result would be that you’d own a smaller percentage of the business than you did before, but will have more people to help you grow the business along with capital which can be deployed in appropriate areas. You can choose to remain a dominant shareholder or can become a minority shareholder as per your requirement.
- Selling a division or a business unit (Stores, products, geography)
When a company sells a division of a business unit, it is called divestiture. This could be in the form of selling stores, products or even operations in certain geographies. Post the sale, the entity which has acquired the unit would have complete control to running the division in terms that have been decided by the sale agreement. This exercise would result in the original organization getting cash rich (due to the sale) but with lesser assets (as it has sold a unit to another entity).
Ex: A business owner who runs 4 tea stores is not able to operate all of them successfully. She sells of 1 of the units to a buyer, and uses the cash for funding the purchase of new machines in her remaining 3 stores.
How to go about selling a part of your business?
The process for sale of a piece of a company is similar to the sale of the entire company, but with some minor changes
- Figure out what you’re selling
What does the buyer get as part of the purchase? Will it be equity shares in the company? Or will they be purchasing a store in a geography you’re not interested in anymore? In the case of the latter, do they have to pay any licensing fee to use your brand name or technology?
Being clear about these aspects are very important prior to starting the proceedings.
What’s the amount of money the oncoming buyer would have to pay? It’s best to work with an auditor to figure out a fair price for the assets you’re selling
- Find buyer
Once you’ve sorted out the price you want for the sale, you have to find potential buyers for the entity. This can be done through –
- Online website – Companies like SMERGERS specialize in helping small businesses find potential buyers for their sale
- Business brokers – Offline players in the market exist who can help you find potential buyers, as well as hand hold you through the process
- Network – It might also be easier for you to look within your network to find a potential buyer. A close friend or a business associate who has seen you build your business might be more inclined towards making an offer, as they already trust you
Do you want to take the full sale value as cash upfront or would you prefer to take a deferred payment over a few years? Depending on your tax planning, the strategy might change.
Once all other details are in place, it’s best to work with a lawyer to chalk out the paperwork and take care of any necessary regulatory filings that maybe required.
When exiting your business completely is not an option, selling a part of your business can be the right move. You get some liquidity, and at the same time continue running your business. Several business owners sell non-core units of their business and invest further in their core areas for future growth. Platforms such as SMERGERS let you advertise and sell part of your business.
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