Raising equity for the first time can be an extremely difficult process for any business owner. One of the first and biggest decisions that must be made in this process is whether to sell a minority or a majority stake in the company.
Understanding the implications, and pros and cons, of each route can help you make the right decision for a long-term business partner and for the future of the business. Here’s a breakdown of some the advantages and disadvantages of minority and majority partnerships that illustrates when each type of investment is best.
Minority Partnerships
Advantages
As a business owner, so long as you maintain majority ownership of your company, little in the day-to-day operations of your company has to change. You are still the primary decision maker. This, of course, is the advantage that comes with having a controlling stake in the business. A minority partnership is most appropriate for a business owner that is not looking to retire just yet, but is looking for a slight change: outside expertise, additional capital, or simply to take some chips off the table. The introduction of a new partner – and their experience and capital – can offer significant growth to a company.
Additionally, having a partner with an ownership stake to share ideas with and run decisions by can be tremendously valuable. It can be lonely at the top, and the psychological benefits alone that come with having a business partner can increase the effectiveness with which you lead and manage.
Disadvantages
Adding another voice to the decision-making process is not always easy to do, especially if you’re accustomed to making decisions unilaterally. Multiple voices in the decision making process can be particularly problematic if you do not see eye-to-eye.
Even if you are selling just a small percentage of your business, it is critical to do the necessary research on the investor and ensure that they are aligned with your goals, values, and mission. Once you have sold a share of your business to an outside investor, it is very challenging and expensive to regain that ownership. It is more often held indefinitely by that partner or sold to another financial sponsor.
Majority Partnerships
Advantages
While majority partnerships obviously involve relinquishing the controlling interest in your company, sometimes that’s not always a bad thing. Finding a majority partner can be a great first step towards exiting your company. By relinquishing majority ownership, you begin the transitioning to new management, but it does not automatically remove you from the day-to-day operations of the business. As you execute an exit strategy, making incremental moves towards one day leaving the company entirely can be helpful.
Taking a majority partner can also be a way to transition your company into new areas for growth. For instance, if you see software opportunities for your hardware company, you might seek a majority partner who can effectively guide the company into the software space. Ultimately, even if you own less than half of the business, that portion could eventually overtake what the whole had been with the right growth strategy and the right partner to help execute it.
Disadvantages
Many of the disadvantages of majority partnerships are the same as minority partnerships, except slightly more amplified. There is inherent risk in giving up control of your company. At that point, no matter what the agreements of the sale have dictated, the new majority partner is able to operate the company in the manner he sees fit. It is critically important to vet any potential majority buyer of your company thoroughly to be certain that their intentions (and their track record) aligns with the vision you have for the company. If you have doubts as to what the buyer will do after attaining control, that person is probably not the right buyer. If you're not sure, here are 9 things to first consider.
Also, once majority share of the company is given up, it can be very difficult to get it back. Therefore, it is absolutely vital that you be certain you are ready to relinquish control of the business before actually doing so.
When it comes time to raise capital for your business, start by asking yourself whether you want a debt offering or are willing to sell equity. Assuming that an equity sale makes the most sense for you and your business, be sure to then consider how much equity you should sell. A minority stake may seem like an obvious choice, but there can be certain situations where a majority share might actually make sense. Investment bankers and M&A advisors can help you through that decision.