Q. I own a small business and had someone offer to buy a portion of it. Is this a good idea?
A. The first question to ask yourself is do you personally need the money? If the answer to this question is yes, is selling a portion of your business the best way to get the money? Make sure that you consider all of your options: a second mortgage on your house or some other property, selling other assets such as a boat, vacation home or investments. However, if you have determined that selling a portion of your business is the best way to get the money you need, the sale may well be prudent.
If you do not need the money for personal reasons, then the question to ask is would the sale of a portion of your business make the smaller piece of the business that you will retain worth more than the larger portion of the business that you would own if you didn’t sell? The answer to this question might be “yes” in three situations:
The proceeds from the sale enable expansion – In some cases, the cash infusion will allow a business to purchase equipment and/or facilities that will enable geographic expansion or the addition of a new offering. Such an expansion could make a smaller portion of the expanded business worth more than a larger piece of the existing business.
The sale allows you access to resources that would create value:
1. Synergies that would grow revenue – If the entity wishing to make the investment were in a position to pass your company business, the investment might make sense. Suppose you run a tire service. If the person who is willing to invest in your business owns a large fleet of taxis and is willing to have you service the fleet, the investment might be mutually beneficial. Alternatively, if the potential investor is willing and able to open the right doors for your company, sales could grow exponentially.
2. Synergies that would allow cost reductions – If the potential investor could significantly reduce one of your major costs, the sale might be a good idea. A larger company might already purchase large quantities of raw materials that your business uses. Because of the volume the larger company buys, it might be able to give your business access to the raw materials at lower costs.
3. Access to intellectual capital – Sometimes the potential investor brings unique knowledge or a special skill set. If the partial sale gives you access to such expertise, the benefit may be significant. The result may be that the person invests your firm, serves on the board or is willing to act as an advisor. After all, she now has some skin in the game. Your interests are linked.
The sale would reduce the risk faced by your business – Property management companies do well when real estate sales are down, because more people rent. Real estate sales agencies do well when homes are selling quickly. These two businesses are counter cyclical -- when one is up the other is down, and vice versa. A mutual investment might provide both businesses with needed protection against bankruptcy during the adverse portion of the business cycle.
If one or more of the scenarios above are applicable, selling a portion of your business may make sense. However, unless there are compelling reasons, we caution entrepreneurs against giving up control of their business. Once that happens, your fate is in the hands of another.