Are you really ready for a ‘partnership’? What steps can you take to optimise success? What price? What terms? How will they pay? So many questions!

Perhaps with the general exception of family businesses, sharing equity in a business has always been an excellent way of locking in the ‘guns’ in your business.

Sharing equity:

• Brings out the best in your people as they taste ‘entrepreneurship’ and ‘ownership’.
• Sets the path for succession… whether to your new junior partner(s) or to a third party with your junior partners locked in.
• Monetises a portion of your equity. The right junior partners can increase the size of the overall pie, so you don’t end up taking home less.
• Builds a trusted partner who can be there when you are away. Reinforces your structure, systems, and processes. Helps make the business less ‘Owner Dependant’ and thereby, more saleable, and valuable.
• Holds you accountable for the professional management and conduct of the business and probably drives you a little harder and delivers focus.
• Forces you to consider the value of the business, the underlying drivers that make you successful, your goals and values, and your strategy for the future.
• Gets you to take your own future more seriously. It is so easy to put succession planning off for another day.

Traps for beginners:

• Setting the wrong expectations for the candidate. Young people often have little idea of the value of a business and how that value (or price) is determined.
• No skin in the game. Too easy to offer 100% vendor terms to the candidate. Irrespective of the terms of the deal, too easy for them to simply walk away. They need some hurt money in this too. Your bank can help.
• Taking too long. That first conversation with the candidate is powerful. You want them as your partner! But the next steps can take years if you haven’t thought it through. They just might take someone else’s great offer… thanks to your good idea.
• Setting the rules. Equity holder agreements, option agreements, dividend policies, tag-along & drag-along, future entitlements, voting rights, taxation management, happy & unhappy leaver, entry and exit methodology & future partners. All takes time and can slow the process down if not pre-considered.
• Picking the wrong candidate. It happens all the time. Someone who was great as a senior manager simply drops the ball. Happened to us a few times over the decades. Take your time to make sure that this is going to work. If it doesn’t work, fix it quickly.

Selling the proposition:

• Think this through. What are you offering? Why would they be interested? What might their objections be? What will their spouse think? Are they worried that they could lose their home? How will they fund it?
• They know little about this process. You will need to explain the whole picture… value, EBIT, multiples, growth, structure, strategy, competitive advantage, and their WIIFM (what’s in it for me).
• Plan this process. Hard to re-open a closed door if they shut down because they think you are acting solely in your own interests. Win-win is important.
• Big picture. What could the future together be? Talk about the alternative paths, even the low probability ones, including the knock at the door. Why is it better than going your own way? Together ‘one plus one equals three’.
• Understand why their strengths and weaknesses add to the overall performance of the business (when properly harnessed and managed).

Is it worth it?

• Simple example of potential upside:
  • Business Owners with $1 million EBIT and multiple of x5, hence simplified value of $5 million. If the owners sell now, they get $5 million.
  • Or, 20% of the business sold to each of two great managers for $1 million each (ignore the tax aspects for now).
  • Business Owners progressively hand over control and day-to-day management to new partners. Eventually only a governance role. Enjoy life.
  • Business Owners all sell in ten years (to the two great managers or, all together to third party) for the same $5 million (but could be a lot more if succession and business strategies work well).
  • Owners gets 2 x $1 million today and $3 million in 10 years, PLUS, 10 years of 60% of the income along the way, that is, another $6 million.
• Doesn’t always work out that simply and who knows what the future holds. There are also different types of taxes involved. But the difference in the simple example is $5 million versus $11 million. You get the idea.
• It will take a reasonable commitment of time; legal costs and, you will need a good and experienced adviser to take you through the process.
• But it can help you keep the best of your people and turn them into your very best business and succession partners into the future.

As always, we are here to help.

Chris Alp and Andrea McNamara