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By: Leah M. Berend, CPA
What if the concept of private equity conjured images of an orchard rather than sharks in suits? The best kept secret for business owners considering a sale to private equity is the power of the “second bite of the apple”. This unique approach, for business owners selling into private equity transactions, offers a range of benefits and opportunities to ensure a prosperous future. This article explores the reasons why business owners choose majority sales to private equity firms, the advantages of retaining a minority stake, and how the “second bite” can revolutionize their financial potential.
The Majority Sale:
Business owners often opt to sell a majority stake in their companies to private equity firms for various reasons. Whether it’s to retire and cash out investments or access capital without excessive debt, the majority sale presents opportunities for growth and expansion.
Cash Proceeds and Rollover Equity:
During a majority sale, business owners receive a significant cash payment known as “cash proceeds.” These funds can be utilized for debt repayment, business expansion, or securing a comfortable retirement. Additionally, retaining a minority stake, known as “rollover equity,” allows business owners to maintain an ongoing interest in the company’s success and potentially benefit from future value appreciation.
The Second Bite:
The “second bite of the apple” strategy holds immense potential for transforming financial prospects. As the company thrives through the resources brought in by the private equity firm, the value of the retained rollover equity grows. Seizing the opportunity to sell this rollover equity in the future can lead to substantial profits, providing added financial security and rewarding the dedication to company growth. This “second bite” has the potential to surpass the initial cash proceeds.
Factors Affecting Rollover Equity Value:
Various factors influence the value of rollover equity. The performance of the company directly impacts the appreciation of the stake, offering avenues for financial growth. Strategic timing of the rollover equity sale aligns with favorable market conditions, maximizing potential returns.
Factors to Consider:
When contemplating a majority sale to a private equity firm, several factors require consideration. Evaluating the expected cash proceeds and rollover equity, along with their impact on future financial well-being, is crucial. Furthermore, market conditions during the sale can impact the price received for the rollover equity. Aligning long-term goals for the company with the opportunities presented by the “second bite of the apple” is also essential. Seeking guidance from experienced financial advisors helps navigate this strategy and make informed decisions aligned with business owners’ aspirations.
Embracing the transformative potential of the “second bite of the apple” strategy can significantly impact the structuring of the sale of a company. Understanding the benefits of a majority sale, the value of cash proceeds, the opportunities presented by rollover equity, and the intricacies of maximizing value through the “second bite” empowers business owners in their decision-making and financial planning process. With the right guidance, unlocking new horizons, securing financial well-being, and embarking on a future filled with limitless potential becomes an achievable reality.
Leah Berend is the Chief Financial and Chief Administrative officer of Oxbow Industries.
With over $2.5 billion corporate financial transactions completed, Oxbow Industries is dedicated to building businesses in partnership with their management teams. Oxbow seeks to invest in leading middle-market companies with outstanding leadership teams and a significant opportunity for equity appreciation. Learn More at www.OxbowIndustries.com