There are many legitimate reasons to sell all or a portion of a company. Selling shares in an enterprise can result in substantial cash that can be used to pay off debts or utilized for investment or charitable donations. The cash could also be put back into the business to finance expansion. Selling a portion of a business may reduce the risk for the owner and allow the owner to increase their assets.
The business owner may have many other motives for selling their shares. The selling of shares in time could be a method of preparing for a possible succession and transferring ownership in a way that lessens the tax burden for the potential new owners. Additionally, selling shares during a business could result from burnout or a lack of desire to expand the business.
Complete vs. Partial Sale
In the beginning, you must decide if you are looking for a full or a partial sale. A full sale is pretty simple. It is essentially the end of your involvement in the business in the event of an employment contract or a consulting agreement that continues the relationship. Sales for businesses can be organized in an approach that gives annuity payment; therefore, it is advisable to complete the sale for those who want to make a complete financial transition.
Partial sales differ. They are a great way to increase capital, reward employees, or initiate ownership transitions. Before you consider a partial sale, consider the implications of the amount you would like to sell. If you sell too much and become a minority investor, you may no longer be able to control or influence decisions.
Different Options for Selling
Going Public
For the majority of entrepreneurs, the idea of going public isn't an option. The process of obtaining a public listing for your company is the most costly choice and complex in terms of auditing, legal, and disclosure rules. However, it's the most effective method of capital raising or maximizing the value of a company.
Selling to Large Private Investors
Businesses do not need to open a public market to draw institutions' attention. It is much easier, faster, and more affordable for companies to offer shares privately. There are some limitations on the length to which companies can solicit investors without applying to the Securities and Exchange Commission (SEC). Private sales give the same advantages of raising capital publically with fewer drawbacks.
Private sales are typically accompanied by finance for venture capital. In venture financing, the business director sells their shares to venture capitalists in exchange for the capital needed to expand or grow. In many cases, substantial share sales to big private investors will also require the business to provide the investors with an opportunity to sit as directors on its board.
Selling to Smaller Investors
In some ways, trading parts in your private company to private investors of a smaller size is more challenging and less difficult than selling shares to sophisticated investors who are large and wealthy. However, choosing the investors is simpler, and often there are already existing relations. Investors with smaller portfolios are less likely to compel certain of the more significant compromises that larger investors might require, like board representation or CEO replacement. However, smaller investors generally have less money, and the legal process could be more difficult.
Selling to Employees
The option of selling shares in your company to employees is an alternative option you can consider. Establishing an Employee Stock Ownership Plan (ESOP) boosts employees' loyalty and decreases the requirements for cash compensation, such as bonuses or awards--that are normally made in cash. The contributions are generally tax-deductible. However, selling shares among employees isn't an option to raise capital.
Important Steps in Selling a Business
Decide on Your Future
Start by answering one inquiry: How do you intend to use your own time, funds, and energy following the sale? Many people find this questioning difficult and steer clear of it. However, those who negotiate with potential buyers with no vision of the future do not always complete the transaction. Write your vision for the future as a document, so you can refer to it and make changes as needed.
Know What Your Shareholders Want
The next question to consider is, what are the stakeholders you serve from your business? Stakeholders are those whose actions affect the company's overall health, such as employees and investors, other owners, or family members. The objectives of these key people will affect the company's future direction, and any prospective buyer would want to understand and be in agreement with their goals before negotiating the deal.
