Apr 22, 2020
Today's episode of the podcast, Robert Hirsch from Freedom Factory discusses "How to Sell Your Share of a Business if You Have Other Partners".
Listen to the podcast, watch the video, or read the transcript below.
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Transcript of Podcast
As entrepreneurs, there are certain things that are very easy for us to do and there's certain things that are very difficult for us to do and frankly, what's easy for us is generally an optimistic viewpoint of the world - grow, grow, grow, sell more. And what's hard for us to do is to realize that we made a mistake or admit it or try and change a situation.
One of the most difficult questions that we get is, how do I sell my share of a business? That's really difficult because it depends on the size, right? If you have a $1 million business or a $10 million business, the answers are a little bit different, but they're actually mostly the same. So, a lot of times in an operating agreement, you'll have something called a push pull clause, or some people call it a shotgun or a Texas buyout, and it's essentially the adult version of you cut the cake and I choose.
So let's say I'm a 50, 50 partner with my business partner, and I no longer want to be in business with them. I can decide to execute it and I'll give a number. It's a disadvantage to give a number, right? Cause you're the one cutting the cake, and then my business partner would have a set amount of time to say, I'm going to buy you out for that half or I'm going to sell to you for that half of the money. And that certainly makes sense from my seat. And that's one way to sell your share of the business, but it's often not the best way for you.
And so how do you maximize it? And so this is a better question. If you want to sell your share of the business, my first course of action would be to determine in this hypothetical example, if my partner wants to sell his or her share of the business too. Because you're going to do much better in terms of market valuation selling 100% of a business than 50% because first of all, it's hard enough to sell a business. Second of all, when you have a 50-50 partner that's been there, done that quote, knows more than you, it gets really difficult to find that right partner.
So if you can sell it and do a fresh start together as a team, that can sometimes be the smartest move for a partnership that's dissolving. Now, you'll maximize the value selling 100% but if you're only selling 50% or a slightly smaller portion of it, it's very difficult to get your value out of the business.
So when I think about my primary business like what we do at Freedom Factory, all we do is help entrepreneurs sell businesses. When I think about that, the last thing I want to do is sell. If I do want to sell, I want to maximize the value. So this is one of those things that often if you want to sell a share of your business, the partnership relationship has degraded enough, or the investor relationship has degraded enough that you're even contemplating it.
And usually if I find myself contemplating it, it's usually six months too late. So I would find the right people in your corner and I would look at your options in order to maximize it. So sometimes there's the options that we see, like a push pull, and sometimes there's the options that we don't see, like we take it to market or come up with an agreement to sell or we do an earn out or a sellers note.
There's so many answers to this really difficult question that it really comes down to what are the variables and the constraints of the problem that you have. And if you want to talk about that, just give us a call for a free consultation here at Freedom Factory. Let's look at the constraints. It's come up with a logic problem and let's figure out the best way to sell your shares to the business.
I'm Robert Hirsch and I look forward to speaking with you soon.
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