Business owners often expect to sell 100 percent of their businesses when pursuing a sale. Getting a “second bite of the apple” refers to an opportunity for a business owner who chooses to retain some ownership in his or her business after a sale process and the potential future value of that ownership interest after the second sale. This is a strategy that many owners overlook, and one that could be beneficial in today’s M&A environment.
“The second-bite strategy is ideal for owners who want to invest in themselves and the company they created to benefit from the future appreciation of the business,” says Corrie Menary, a Partner at Kirtland Capital Partners, a private equity firm based in Cleveland, Ohio. “When a business owner is excited about the future growth of the business, it is a good opportunity to retain ownership post-sale because the expectation is that the value of that investment will continue to grow.”
Smart Business spoke with Menary about how business owners can get a second bite of the apple.
In what other circumstances is getting a second bite an ideal strategy?
The economic instability in the market today is causing buyers to be more conservative in what they are willing to pay for a business than a year ago. As a result, business owners who had their hearts set on a certain price may be disappointed with today’s company valuations. In this scenario, it is beneficial for the owner to reinvest and have an opportunity to sell his or her remaining shares later at a higher multiple than might be available in the market today.
What should owners consider before committing to a second bite?
All business relationships are built on trust and if there is not trust among the business owner and buyer, it can create a challenging partnership post-closing. Also, the business owner must understand that retaining ownership does not equate to being the sole decision maker in the business any longer.
Another consideration is that when business owners elect to reinvest their money, the investment will be locked up for a while. Those individuals who might need access to that money in the short term would not be good candidates for a ‘second bite’ reinvestment, whether it be because of age, health considerations, or any other personal reason.
Business owners must ask questions and lean on their advisers for support to determine if a second bite of the apple is attractive to them. One should ask if the company will be combined with another business. If so, it is essential to understand the health of the other business and the strength of its leadership. Those businesses together will drive the value of the reinvestment, not just the owner’s company alone. Also, understanding the structure of the re-investment is critical to ensuring that all interests are aligned.
Who can owners work with to achieve their goals?
It is wise to work with team of advisers who have M&A experience before engaging in deal discussions. Investment bankers, lawyers, wealth mangers and accountants can all help guide business owners to achieve their personal goals.
It is ideal to get these advisers involved early to optimize tax, estate and gift planning decisions. Additionally, these advisers may help the business owner to identify blind spots that are likely to snarl a future sale process.
Business owners often don’t appreciate the wealth creation opportunity a second bite of the apple presents. It is something those considering a sale should explore. There are instances in which an owner makes more money off the second bite than in the initial sale because of the growth in the company. Staying involved in the business allows an owner to influence the future performance and maximize the value of that second bite of the apple. ●
INSIGHTS Private Equity is brought to you by Kirtland Capital Partners