Exploring Partnerships: Majority or Minority Ownership?
The following article, written by CFO Darrell Metcalf, first appeared in Impact Magazine. It is reposted here with permission by the Private Practice Section, APTA.
Every day the financial news highlights stories about one company buying another for some unfathomable amount of money. While those big money deals grab headlines, significantly more transactions are occurring at the small business end of the scale. However the dynamics of these transactions are rarely explored.
Perhaps you are a small business owner who hopes to someday transform your years of hard work into a meaningful pay-off, while possibly retaining employment for yourself and/or opportunities for your key employees who helped build your successful operation. What type of structures could help you take some money off the table while retaining or relinquishing control, depending on your goals?
Once you have decided you no longer want to own 100% of your business, the most important decision you will make is what you want the company to look like after you sell all or a portion of it. Establish goals and write them down prior to starting the process. In the midst of satisfying a buyer’s due diligence requests, attempting to negotiate an agreement, continuing to run a business, and swimming with the details of what a lump sum of cash might mean, is not the best time to begin thinking about what you want the final “deal” to look like. Well in advance of identifying potential buyers, you should have 3 to 5 simple goals for the transaction. For example: (1) I don’t want to give up more than a 30% ownership stake; (2) I want to work for at least 5 years after the transaction and make approximately $100,000; (3) My maximum non-compete is 3 years after my employment ends and; (4) I want upside potential if the company continues to grow during my post-sale employment. Having your goals written down in advance will help you hold your course as the sirens of the “deal” begin to sing.
In terms of structure, only one demarcation is meaningful: Will the sale be for a minority or a majority share of your business? Everything in between are simply percentages that define the price that changes hands between buyer and seller.
Sale of a Majority Stake: If you sell 51% of your business, you have given up control. Irrespective of what a buyer might tell you about their intentions, once you have sold 51% of your business you no longer have control. Yes, protections can be written into agreements, bylaws or operating agreements that require unanimous or high percentages of consent for significant decisions, but the culture you have developed and the way you treat patients each day are defined by small individual interactions and decisions with patients and employees. The processes and procedures that define those interactions are now made by the majority owners.
Sale of a Minority Stake: The possible permutations and structure of a sale of a minority stake are as varied as your imagination and tolerance for incurring legal fees. Most buyers are going to want to acquire at least a 25% stake in your business, if for no other reason than to make it worth their while. Every buyer will want to perform some level of due diligence. A 25% stake is pretty much the entry point to justify the costs that will be incurred to evaluate whether your business is a good investment and will fit within a buyer’s business strategy. Between 25% and 49% the possibilities really come down to how much cash you want and how many conversations will be had if the buyer disagrees with you on strategy.
If you have pre-established your goals, you can be more flexible with the “less important” details of the transaction. Everybody talks about win/win transactions, but the only way for you to measure that is to ensure that you do not give in on something you had pre-established as important. If you do decide to give in on one of your original goals, at least you will have a measuring stick to ensure you received something of equal value in return. Negotiating a sale is a very dynamic process, but as with most things, preparation is the key to a successful result.
Darrell Metcalf, MBA is senior vice president and chief financial officer for RehabVisions. He can be reached at dmetcalf@RehabVisions.com.