The Pros and Cons of Selling Part of Your Business

March 11, 2020 by First Federal Bank

Two businessmen share coffeeUnder certain circumstances, bringing a new equity partner into your business can be a wise choice that leads to growth and continued upward momentum.

Building a business from the ground up on your own is no small feat, so you may be hesitant to consider the prospect of selling part of your business. Under certain circumstances, bringing a new equity partner into your business can be a wise choice that leads to growth and continued upward momentum.

Raising the capital you need

In most cases, selling a portion of a business is a means to provide a quick injection of capital. Doug and Polly White, contributors for Entrepreneur, write that selling part of your business to a second party is a great way to help your business expand. If you’re looking to reach a new market or tap into new potential for growth in your products or services, bringing in a new minority owner can help you fund the equipment, space and staff you’ll need.

Bill Snow, author of Mergers & Acquisitions for Dummies, writes that selling a stake in your company is also a great way to gain liquidity from an otherwise illiquid asset. Selling off part of your business to a trusted partner will give you the cash you may need to relieve pressure, which you can use to pay off debt or invest elsewhere.

Working with partners successfully

Perhaps the most obvious downside to bringing a partner into your business is the potential for ideological conflict. While you may retain a majority stake in your business with a control investment, you’ll need to work with your co-owner to operate in such a way that all parties are pleased. This may mean having to compromise on points you would otherwise not have to if you were the sole owner.

Peter Lehrman, founder and CEO of Axial, writes in Inc. that a new business partner isn’t necessarily a hindrance. If you do the diligence before agreeing to bring in an equity partner, you can be confident that your partner has a vision and goal for their stake in the company. They should be able to complement your weaknesses and strengths, allowing you to make your businesses stronger and more adaptable.

Bringing in a partner may be a good opportunity to create a mutually beneficial relationship. If your partner has access to valuable resources or is the owner a company with whom you’d do business, you stand to put your business in a greater position for success.

If your business is successful enough, you may be able to negotiate a non-control investment or minority equity investment. According to Snow, this is when your new investor has no control over the direction of the company but wants to come on in the hope of generating long-term profits.

The result may be less stress and more liquid assets, but it could come at the cost of complete control over your business’ direction. Your business is your baby, but if you meet a partner who has an agreeable outlook and vision for the trajectory of your business, it may behoove you to bring them in as an equity partner.

Categories: Small Business