Why acquiring 80% of a business is actually better than buying 100%....

Why buying 80% of a business is better than buying 100%.

After a number deals of which I have acquired 100% share capital of a business, I have since used a method that I feel adds more long term value to a transaction to a buyer and I would also argue, to a seller.

?That method is to only acquire 80% of a business.

I know you are scratching your head thinking, how can 80% be better value than 100%?!

Let me explain why I feel this new model has legs and is making doing deals easier than ever and I am seeing ore successful handover periods than ever before.

• Less finance to raise

By definition, if you are only buying 80% of something, you only need to pay 4/5 of the total consideration.?

This means that not only is the total consideration cheaper, but also the initial day 1 payment is less.?

If you are acquiring a business for $1m, and paying 50% on day 1, that day 50% is now $400k instead of $500k which can significantly help with finance raising, particularly if you are leveraging the assets on the company in question.

• Buyer keeps the knowledge, contacts and experience of owner invested in the business?

You now have somebody who knows more about the business than anybody else in the world as a significant shareholder and you can retain their knowledge, contacts and relationships with key staff and employees indefinitely, not just the length of any half hearted handover where they don’t really want to be there.?

Sometimes these zombie handovers can be more of a hindrance than a help. With 20% of the business, a seller is super incentivised to not only maintain, but grow their shareholder value both short term for dividends and long term for a liquidity event.?

Owners get 2 exits?

The owner gets their initial consideration on day one and their deferred and/or earnout payments to reach the total consideration over a period of time. Pretty standard stuff right?

However, Im sure we have all seen this before where somebody comes into a bit of money they tend to blow it pretty quickly on things they felt would make them happy at the time only to regret many of these splurges (usually a boat!) and wish they had kept the cash.?

By retaining 20%, the seller has the opportunity for a second exit at a later date to recoup any funds they regret splurging post sale.

?This not only gives the owner two bites of the cherry but it also incentivises them to work with you to add as much shareholder value as possible to grow their equity stake and cash out, again, at a later date to refill the coffers.?

This is the equivalent to a unpaid, long term , handover period with a co shareholder who wants to genuinely help, rather than just ticking the box of a handover to get their money as per the terms in the SPA.

• Gives lenders comfort of successful handover?

Lenders love to see that the sellers are retaining a stake for all the reasons I have mentioned above.

?It gives them comfort that the transition period has a much higher success rate due to the continuity that keeping the seller provides. By limiting the amount of change in the business in a short space of time and ensuring the staff and suppliers know that the seller is still involved in the business, this keeps a sense of calm and prevents key personnel panicking at the thought of change. Us humans hate change.

With a higher chance of a successful transition period, this of course makes raising acquisition finance more attractive to lenders.

What to do with the 20% long term?

There a few options to explore in regards to the long term ownership of the 20% equity the owner has kept.

One option is to agree that your plan, and the whole reason why you have made the acquisition, is to grow the company post acquisition, thus making it more valuable.

?In doing so, while the company becomes valuable, the company will pay dividends to all shareholders until a suitable exit can be achieved at the new increased market value. The seller then benefits from a increase of valuation in their shares, while receiving dividendx and they also get their second exit to buy another boat.

Another option, and this is my preferred choice,? is to purchase the remaining 20% back from the seller.

This price can be a pre-determined figure , maybe with a 10% premium on the original sale price, alternatively it can be at the current market value at the time in question.

This is the best part of doing deals, there are no rules, you can negotiate anything you want!

For example, you may want to include a option clause where you can buy back the 20% at current market value 36 months after completion. This could nicely coincide with the other acquisition finance being paid off in full by this point which will free up the cash flow to fund the buy back option.

You can agree ahead of time that you will pay for the shares on a deferred basis over a pre agreed amount of time from the companies cash flow. For example, over 3 years in monthly instalments or in quarterly payments over 12 months.?

Either way, the seller benefits both short and long term with dividend payments, the business grows while they dispose of day to day management duties and they can a second exit at a later date.

To summarise, I feel the benefits of acquiring 80% are

- You have less initial consideration to find on day 1.

- Ensures the seller maintains skin in the gam

- Provides comfort to lenders that a successful, smooth and lengthened handover will take place and create stability for the company to continue to perform

- Ensures the sellers relationships, industry experience and in depth knowledge of this particular entity stay in the company in a ownership capacity where they are incentivised to help the business perform. No zombie handover.

- The owner gets their pay out on day 1 as well as their deferred/earn out payments like most transactions. They then also get dividends and a second exit at a later date.?

- You can control the terms of any buy back option in advance to suit your needs that eventually conclude in yourself taking full ownership of the business to do what you want with it.?

Jamie Simpson is private investor in UK based SME’S with a turnover of ￡1m+ where he implements his tried and tested growth formula to create added shareholder value before exiting within a 36 month period to create a liquidity event.?

Open to joint ventures in the UK.