Selling a portion of your business can be an effective strategy for raising capital, reducing risk, or transitioning towards an eventual full-scale exit from the business. There are several ways to sell part of a business, including partial share sales, asset sales, and the sale of franchises. Each method has its advantages, considerations, and potential challenges. This article will explore these options in detail, providing a comprehensive understanding of how to sell part of your business.
1. Partial Share Sale
A partial share sale involves selling a portion of your company’s shares to a prospective purchaser. Some advantages include:
- retaining partial ownership and control of the business;
- reducing your risk and responsibility by bringing on a new owner to share the load;
- creating a more well-rounded management team by hiring strategic partners with different expertise and skills; and
- a partial return on your initial investment.
However, before proceeding with a partial share sale, you should consider:
- the extent to which your ownership proportion (and potentially, your control) will be diluted;
- whether you and the new owner are strategically aligned on how the business should operate, its direction and objectives. If you are not aligned with a prospective owner, the risk of dispute may be heightened;
- whether the existing corporate governance documents will need to be amended or redrafted to account for the new ownership structure;
- the value of the shares for the purposes of the sale; and
- tax implications flowing from the transaction.
You must consult a legal professional to assist you with this process. The proposed share sale will need to be documented via a Share Sale Agreement, and you may need to enter into a new Shareholder Agreement clearly defining the parties’ rights and responsibilities moving forward.
If you are selling a controlling interest in your business, you may need to obtain consent or approval from the relevant regulatory body regarding any licences, permits, or approvals held by the business that the sale may impact. You may also be required to obtain consent under the business’ contracts regarding any sale that results in an effective change in ownership.
2. Asset Sale
An asset sale involves selling specific assets or divisions of your business rather than shares. This can be an effective way to streamline your operations, focus on core competencies, or raise capital without diluting ownership. Some advantages include:
- offloading underperforming or non-core assets and business divisions
- raising capital or reducing debt;
- being more selective about the specific assets of the business that you no longer wish to control; and
- maintaining control over a segment or division of the business.
On the other hand, before proceeding with the asset sale, you should consider:
- business disruption during the transition period;
- discharging financing and security interests over the assets being sold;
- renegotiating contracts and licences which are affected by the sale, which are dependent on assets you may no longer own after the sale is finalised;
- valuing the assets;
- assessing the criticality of certain assets to the business;
- whether the restraints and non-compete clauses allow you to continue operating the remaining assets of the business;
- employment issues (which may arise if selling a business division or unit); and
- addressing any intellectual property rights associated with the assets; and
- major tax consequences, as each asset may be treated differently for tax purposes, potentially resulting in a mix of capital gains and ordinary income tax.
For these reasons, it is vital that you consult a legal expert to assist you with this process. In addition, the sale will need to be documented via an Asset Sale Agreement.
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3. Sale of Franchises
If your business model is suitable, selling franchises can be an effective way to expand your brand and generate income without significantly increasing your personal workload or risk. Some advantages include:
- expanding your brand with minimal capital investment;
- generating ongoing income through franchise fees and royalties;
- leveraging motivated owner-operators; and
- allowing for rapid expansion into new markets.
However, you should also consider:
- whether it requires a strong, replicable business model;
- the need for comprehensive operations manuals and training programs;
- any ongoing support and quality control;
- brand reputation regarding franchisee selection. As a franchisor, the Franchisee will be operating under your business’ brand and could ultimately damage its reputation;
- highly regulated franchising industry. This includes franchising agreements and disclosure documents, which are complex and must comply with the laws of the relevant jurisdiction;
- intellectual property rights and branding;
- whether territory rights and restrictions are clearly defined; and
- income from franchise fees and royalties is typically treated as ordinary business income.
Choosing the Right Option
The best method for selling part of your business depends on various factors, including your goals, the nature of your business, market conditions, and personal preferences. Here are some questions to consider:
- what is your primary goal? (e.g., raising capital, reducing workload, expansion);
- how much control are you willing to give up?;
- what is the current market value of your business or its assets?;
- are there potential synergies with strategic buyers or partners?;
- what are the tax implications of each option in your specific situation?;
- how will the sale affect your employees and current operations?; and
- what are your long-term plans for the business?
When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.
This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.
Preparation is Key
Regardless of your chosen method, thorough preparation is crucial for a successful partial business sale. This includes:
- Getting your financials in order: Ensure your financial statements are accurate, up-to-date, and preferably audited;
- Documenting processes: Having well-documented operational processes makes your business more attractive to buyers and easier to franchise;
- Addressing legal issues: Resolve any outstanding legal issues and ensure all contracts and agreements are in order;
- Building a strong management team: A business that can run without the owner’s constant involvement is more valuable;
- Improving performance: Take steps to improve your business’s performance and address any weaknesses before the sale; and
- Seeking professional advice: Engage with lawyers, accountants, and business advisors experienced in business sales and your chosen method.
Key Takeaway
Selling part of your business can be a complex process, but it also offers significant opportunities for growth, capital raising, and debt and risk reduction. Whether you choose a partial share sale, asset sale, or franchising, each option has advantages and considerations.
The key to success lies in careful planning, thorough preparation, and seeking professional advice to navigate the sale’s legal, financial, and operational aspects. By understanding your options and taking a strategic approach, you can successfully sell part of your business while setting yourself up for future success.
Remember, selling part of your business is not just about the transaction itself but about positioning your business for its next phase of growth or transition. With the right approach, you can achieve your goals while ensuring the continued success of the business you’ve worked hard to build.
If you want to assess your options further or have any questions, our experienced sale of business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
You should consider the potential dilution of your ownership, alignment with the new owner, necessary changes to corporate governance documents, share valuation, and tax implications such as Capital Gains Tax.
Selling assets can help you raise capital, streamline operations by offloading non-core assets, and maintain control over other parts of the business. However, it may involve business disruption, contract renegotiations, and significant tax considerations.
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