When the time comes to explore potential buyers for your business, one crucial question arises: What percentage of your company do you want to sell? The answer hinges on your post-transaction goals for the company and your personal finances.

You may consider factors such as your desired role post-sale, liquidity needs, decision-making authority, and risk tolerance. Your preferences will guide you towards a minority deal, majority deal, or full sale. However, regardless of your initial inclination, it's wise to explore all deal types to maximize the transaction's outcome.

The Pitfalls of Limiting Your Options

Many founders and their investment bankers make the mistake of focusing solely on their preferred deal type when approaching the sales process. This narrow approach has several drawbacks:

1. Lack of flexibility. If you pursue only a minority deal and later realize you want to sell the entire business, you've wasted valuable time and essentially have to start over. In our experience, about a third of clients change their minds about the desired transaction type.

2. Weakened negotiating position. Concentrating on a single deal type prevents you from leveraging the strengths of one type to negotiate better terms in another.

3. Reduced competition. In the lower-middle market (valuations under $500M), prices and terms are relatively subjective. Considering multiple deal types attracts more potential buyers/investors, providing greater market transparency.

4. Inexperience. As a first-time seller, you may not fully grasp the implications of working with a partner, such as your post-transaction role and level of control.

Instead of limiting yourself, have your M&A advisor/investment banker curate a list of potential buyers/investors across all deal types. While more work for them, it gives you a comprehensive menu of realistic options to evaluate based on each transaction type's merits.

Minority Deals: Maintaining Control

In a minority deal, existing shareholders sell less than 50% of the business, gaining some liquidity and/or growth capital while retaining majority ownership. This structure can provide liquidity, maximize post-transaction ownership, and add team support, but it also presents challenges related to terms, decision-making, and future equity structure.

Minority deals offer several advantages:

1. Greater influence over your post-transaction role, enabling you to continue working in your desired capacity.

2. Continued control over the company's future decisions and direction.

3. A larger share of the economics in future liquidity events, as selling only a small portion now minimizes dilution.

However, minority deals also have drawbacks:

1. Reduced liquidity for founders, as only a limited number of shares are sold. Primary capital infusions further diminish the proceeds available for shareholder liquidity.

2. Minority protections granting investors additional rights, such as liquidation preferences, dividends, board control, veto rights, anti-dilution protection, and redemption rights, effectively giving them majority-like influence.

3. Increased personal risk, as most of your net worth remains tied to the company's performance, potentially leading to conservative decision-making that conflicts with investors' growth-oriented objectives.

4. Partner-fit is imperative in order to minimize friction at the board level.

5. Lower likelihood of securing a "strategic" valuation compared to majority/full sales, as investors typically bring incremental rather than exponential value.

While a third of founders we work with initially express interest in minority deals, only 10-15% ultimately pursue them due to concerns caused by overly risky investor protections and the security structures needed to achieve terms and valuations comparable to majority or full sales.

Majority Deals: Balancing Liquidity and Upside

Majority deals involve selling more than 50% of the company, providing substantial liquidity or growth capital but relinquishing decision-making control to new investors. In many ways, their pros and cons are the inverse of minority deals.

Majority deals offer several benefits:

1. Significant liquidity for founders, even if the deal includes primary capital.

2. Reduced personal financial risk tied to future business performance.

3. Potential for a "second bite of the apple" through continued ownership and participation in future transactions such as a sale or IPO.

However, majority deals also have drawbacks:

1. Diminished control over the company's future decisions, requiring comfort with the idea of giving away the role of sole decision-maker.

2. Potential changes to the founder's post-transaction role, although firms often strive to keep management teams intact and motivated.

3. Partner-fit remains an important aspect to consider, although less than when compared to minority deals, as the new investor will have primary say in the business's direction.

4. A smaller percentage of future liquidity events due to reduced post-deal equity ownership.

5. Low probability of achieving a "strategic" valuation, although the control premium can lead to higher valuations than minority deals.

Recently, increased competition and financial strength among lower middle market investors, coupled with low interest rates and the need to deploy the capital raised over the past few years, have driven up valuations for majority transactions. As a result, we've seen a growing number of founders opt for majority deals, with the benefits often outweighing the weaknesses.

Full Sales: Selling 100% of the company

Full sale transactions to strategic buyers offer the highest potential valuation but require significantly more time and precision to execute.

The advantages of a full sale include:

1. Complete liquidity for the founder, maximizing proceeds from the sale.

2. Higher likelihood of securing a "strategic" valuation, often 20-30% higher than financial buyers, due to the synergies made possible by the strategic buyer's existing customer base, operational resources, and budgeting capabilities.

3. Minimal risk tied to future business performance, as the founder fully liquidates their ownership.

However, full sales also have disadvantages:

1. Little to no future economic benefit, as the founder no longer holds any investment in the business.

2. No control over the company's future vision and direction.

3. Very limited likelihood of a long-term role in the organization post-transaction, as the business will be absorbed into the larger entity.

In some cases, full sale deals may include earnouts or acquiring party equity, technically making them less than 100% sales. These components should be valued lower than cash offers and viewed as bonuses rather than guarantees.

Leveraging Deal Types in Negotiations

By considering all transaction types simultaneously, you can leverage the strengths of one deal to negotiate more favorable terms in another. For example, you can use the prospect of a full sale to increase the valuation in a majority deal or strip unfavorable terms from a minority deal contract.

We strongly advise founders to explore all deal types in parallel to maximize outcomes and optionality. Making assumptions without a complete set of facts can lead to suboptimal decisions.

The Value of Hiring an M&A Advisor

Managing a transaction while running your business can be overwhelming and risky, as distractions can negatively impact business performance.

Hiring an experienced sell-side M&A advisor/investment banker allows you to focus on your business operation while they handle the intricacies of the deal.

M&A advisors specializing in sell-side transactions can navigate the complexities of term negotiations, handle the bidding process, and deal with the required paperwork, leveraging their expertise to achieve the best possible outcome for founders who have already invested so much in their businesses.

When the time comes to explore potential buyers for your business, one crucial question arises: What percentage of your company do you want to sell? The answer hinges on your post-transaction goals for the company and your personal finances.

You may consider factors such as your desired role post-sale, liquidity needs, decision-making authority, and risk tolerance. Your preferences will guide you towards a minority deal, majority deal, or full sale. However, regardless of your initial inclination, it's wise to explore all deal types to maximize the transaction's outcome.

The Pitfalls of Limiting Your Options

Many founders and their investment bankers make the mistake of focusing solely on their preferred deal type when approaching the sales process. This narrow approach has several drawbacks:

1. Lack of flexibility. If you pursue only a minority deal and later realize you want to sell the entire business, you've wasted valuable time and essentially have to start over. In our experience, about a third of clients change their minds about the desired transaction type.

2. Weakened negotiating position. Concentrating on a single deal type prevents you from leveraging the strengths of one type to negotiate better terms in another.

3. Reduced competition. In the lower-middle market (valuations under $500M), prices and terms are relatively subjective. Considering multiple deal types attracts more potential buyers/investors, providing greater market transparency.

4. Inexperience. As a first-time seller, you may not fully grasp the implications of working with a partner, such as your post-transaction role and level of control.

Instead of limiting yourself, have your M&A advisor/investment banker curate a list of potential buyers/investors across all deal types. While more work for them, it gives you a comprehensive menu of realistic options to evaluate based on each transaction type's merits.

Minority Deals: Maintaining Control

In a minority deal, existing shareholders sell less than 50% of the business, gaining some liquidity and/or growth capital while retaining majority ownership. This structure can provide liquidity, maximize post-transaction ownership, and add team support, but it also presents challenges related to terms, decision-making, and future equity structure.

Minority deals offer several advantages:

1. Greater influence over your post-transaction role, enabling you to continue working in your desired capacity.

2. Continued control over the company's future decisions and direction.

3. A larger share of the economics in future liquidity events, as selling only a small portion now minimizes dilution.

However, minority deals also have drawbacks:

1. Reduced liquidity for founders, as only a limited number of shares are sold. Primary capital infusions further diminish the proceeds available for shareholder liquidity.

2. Minority protections granting investors additional rights, such as liquidation preferences, dividends, board control, veto rights, anti-dilution protection, and redemption rights, effectively giving them majority-like influence.

3. Increased personal risk, as most of your net worth remains tied to the company's performance, potentially leading to conservative decision-making that conflicts with investors' growth-oriented objectives.

4. Partner-fit is imperative in order to minimize friction at the board level.

5. Lower likelihood of securing a "strategic" valuation compared to majority/full sales, as investors typically bring incremental rather than exponential value.

While a third of founders we work with initially express interest in minority deals, only 10-15% ultimately pursue them due to concerns caused by overly risky investor protections and the security structures needed to achieve terms and valuations comparable to majority or full sales.

Majority Deals: Balancing Liquidity and Upside

Majority deals involve selling more than 50% of the company, providing substantial liquidity or growth capital but relinquishing decision-making control to new investors. In many ways, their pros and cons are the inverse of minority deals.

Majority deals offer several benefits:

1. Significant liquidity for founders, even if the deal includes primary capital.

2. Reduced personal financial risk tied to future business performance.

3. Potential for a "second bite of the apple" through continued ownership and participation in future transactions such as a sale or IPO.

Nonetheless, majority deals are certainly not exempt from drawbacks such as:

1. Diminished control over the company's future decisions, requiring comfort with the idea of giving away the role of sole decision-maker.

2. Potential changes to the founder's post-transaction role, although firms often strive to keep management teams intact and motivated.

3. Partner-fit remains an important aspect to consider, although less than when compared to minority deals, as the new investor will have primary say in the business's direction.

4. A smaller percentage of future liquidity events due to reduced post-deal equity ownership.

5. Low probability of achieving a "strategic" valuation, although the control premium can lead to higher valuations than minority deals.

Recently, increased competition and financial strength among lower middle market investors, coupled with low interest rates and the need to deploy the capital raised over the past few years, have driven up valuations for majority transactions. As a result, we've seen a growing number of founders opt for majority deals, with the benefits often outweighing the weaknesses.

Full Sales: Selling 100% of the company

Full sale transactions to strategic buyers offer the highest potential valuation but require significantly more time and precision to execute.

The advantages of a full sale include:

1. Complete liquidity for the founder, maximizing proceeds from the sale.

2. Higher likelihood of securing a "strategic" valuation, often 20-30% higher than financial buyers, due to the synergies made possible by the strategic buyer's existing customer base, operational resources, and budgeting capabilities.

3. Minimal risk tied to future business performance, as the founder fully liquidates their ownership.

The disadvantages of a full sale may include:

1. Little to no future economic benefit, as the founder no longer holds any investment in the business.

2. No control over the company's future vision and direction.

3. Very limited likelihood of a long-term role in the organization post-transaction, as the business will be absorbed into the larger entity.

In some cases, full sale deals may include earnouts or acquiring party equity, technically making them less than 100% sales. These components should be valued lower than cash offers and viewed as bonuses rather than guarantees.

Leveraging Deal Types in Negotiations

By considering all transaction types simultaneously, you can leverage the strengths of one deal to negotiate more favorable terms in another. For example, you can use the prospect of a full sale to increase the valuation in a majority deal or strip unfavorable terms from a minority deal contract.

We strongly advise founders to explore all deal types in parallel to maximize outcomes and optionality. Making assumptions without a complete set of facts can lead to suboptimal decisions.

The Value of Hiring an M&A Advisor

Managing a transaction while running your business can be overwhelming and risky, as distractions can negatively impact business performance.

Hiring an experienced sell-side M&A advisor/investment banker allows you to focus on your business operation while they handle the intricacies of the deal.

M&A advisors specializing in sell-side transactions can navigate the complexities of term negotiations, handle the bidding process, and deal with the required paperwork, leveraging their expertise to achieve the best possible outcome for founders who have already invested so much in their businesses.