Taking a Second Bite of the Apple: How Small & Medium Business Owners Can Create Generational Wealth With This Strategy

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By Dena Jalbert, Founder & CEO, Align Business Advisory Services

Many small and medium business owners, often family-owned enterprises, dream of the day when they can sell their business, cash in, retire to easy street or focus on some of their other priorities in life.

What these owners may not know is that they may not have to liquidate all of their equity in the business, a business oftentimes created through years of toil, sweat and tears, in one fell swoop.

In fact, if they structure their exit in a particular way, they may have the opportunity to take another bite of the apple.

Taking a second bite simply means to sell a portion of the business, typically working with a private equity (PE) firm to seal a part of the business and then work with the PE firm to create increased value and sell the remaining holding in the company at a potentially larger amount than the first.

Pretty impressive, right?

Let me explain how this works:

In the initial transaction, a business owner will sell 100% of their business to a PE investor. As part of that transaction, the business owner will re-invest their proceeds and retain a minority interest now owned by the PE. This minority interest can be anywhere from 1 to 49 percent – it’s a personal preference, so long as it’s structured so that the seller does not have a controlling interest in the business post-sale.

The goal of the PE is to then grow the business substantially through organic growth and through additional bolt-on acquisitions. When the PE firms exits the business, itself, in a few years, they’ll likely be targeting a $100 million to $300 million transaction. The scale of this transaction would likely mean that the original owner who sells his or her controlling stake in the enterprise today and retains equity will get to participate in that future transaction – the second bite of the apple. It’s a very lucrative structure, creating generational wealth for many founders in a way that would not be possible from a single transaction. For example, I recently had the pleasure of meeting with a company that succinctly summarized why a second bite is important. The owners have no desire to sell their company internally, but they also do not wish to sell it for a multiple that will only get them what they could generate on their own by continuing to own their business and grow it.

So imagine you’re the founder of a business you’ve sold to a PE partner and you’ve retained a 30 percent stake in the business in what is now a $200 million enterprise. You could reap up to an additional $60 million as part of your second bite, in addition to what you already earned through your initial sale.

For owners who aren’t quite ready to fully exit today and see the growth potential in their business, this can be an extremely lucrative option to consider in your exit strategy.

This kind of strategy is generally industry agnostic, so whether you own industrial services, consumer products, healthcare services, and business services firm, you can take advantage of this strategy. In fact, investor demand in these industries has actually risen due to their anti-recession characteristics and continued growth despite the larger economic downturn. What I’ve seen so far in 2020 is that investors have moved down the spectrum, focusing on smaller, but still high-quality companies in which to invest.

It’s in this space where business owners are ideally situated to take that second bite.

For those interested in pursuing a second bite, it is important to be mindful of a few things. For starters, it’s always wise to know how a buyer will be financing the transaction and how and when money will be paid out. Always consider the terms and conditions and make sure that they match up with your deal strategy. By doing so, not only will you set yourself up for success, but you will position yourself to earn more.

And that’s totally worth a second bite.

Dena Jalbert is the Founder and CEO of Align Business Advisory Services is a mergers and acquisitions (M&A) and business advisory firm based in Winter Park, Florida.