Welcome back to Becoming a Better Business Broker in 30 Days!
This concise series title describes exactly what we hope you get out it - becoming a broker that can close more deals with less work.
If you're currently suffering from a deal-induced migraine, we recommend the following remedy, Overcoming Deal Barriers.
Building off of yesterday's chat, today we're taking you back to college with Roll-over Equity 101.
Roll-over equity is an excellent way to ease concerns for a Buyer. That said, many Sellers are selling for a reason (to stop working) so how do you pitch them on staying involved post-sale?
Today's article covers how to pitch your Seller on this concept, who's a good fit, and everything else you need to know about rolling over equity in a deal.
This is a big one so let's get after it 👇
Why Roll-over Equity?
For Sellers, rolling over equity is (potentially) like keeping your cake and eating it too. You sell a portion of your business now, pocket some cash, and stay on board for the ride to potentially sell again at a higher price. But here's the catch: the strategy isn't for every Seller. If your client is feeling burnt out or daydreaming of sipping cocktails on a beach, rolling over equity is probably not on their vision board.
The Ideal Candidate for Roll-over Equity
So, who's cut out for this double-dip strategy? It's perfect for business owners who:
- Aren't tired of the game just yet and have 'gas in the tank'
- See untapped growth potential but lack the resources (includes both financial and operational know-how)
- Are you considering selling in 3-5 years anyways
- Are looking to 'take some chips off the table' for short-term needs
The Pros of Rolling Over
- Aligned Interests: Buyers have more peace of mind knowing the Seller is still invested in their business's success, allowing them to partner on continued growth.
- Tax Savvy: Potentially defer capital gains taxes for the Seller, allowing your client to keep more money in your pocket.*
- Second Wind: Adding an aligned business partner (and new capital) may jump-start your Seller's motivation to grow the business. Business ownership is a high-stress (and lonely) game. It is amazing how much a difference adding a new business partner who can take on a few responsibilities your client hates (i.e. bookkeeping, HR, etc.).
- Risk Reduction: The Seller's continued involvement can reassure buyers, mitigating their perceived risks. Further, Buyers will potentially view the asking price as less aggressive, as much of the valuation is actually based on future growth/performance, similar to an earn-out.
*Big Disclaimer: Please confirm your client's eligibility for tax efficiencies with a qualified tax professional. We’re just people writing articles on the internet (i.e. we are not qualified tax advice-givers).
The Flip Side
- Cash Compromise: The Seller will sacrifice some immediate liquidity for future gains.
- Vision Clashes: Aligned interests can sometimes lead to disagreements on the business's direction. This makes it essential to establish good rapport between Buyer and Seller. More than one or two buyer-seller meetings are needed - encourage the Buyer and Seller to create space to foster a personal connection (dinners, hikes, activities outside of the work environment, etc.).
- Market Gambles: The future is uncertain, and so is the value of the Seller's retained equity. On the Buyer side, they are also taking a risk that the Seller is actually motivated to grow the business - rather than keep the business flat.
- Complex Choreography: These deals are not cookie-cutter. This added complexity may add costs to both parties. As a Broker, this added complexity creates intricate negotiations that could increase the likelihood of the deal falling apart.
Making a Seller's Business a Roll-over Contender
To position your Seller's business as a prime candidate for roll-over equity, consider these insights:
- Early Engagement: Identify prospects that are eligible for roll-over equity early in your prospect discussions. This may require planning 2-5 years before their intended exit. This opportunity often presents itself when you are speaking with a 40-something Seller that doesn't have a concrete plan for what they want to do next and their primary goal is creating liquidity. These are great prospects for positioning a roll-over equity deal.
- Choose Wisely: As we know, not all Buyers are created equal (perhaps the understatement of the year 😂). Your job is to help screen Buyers to find one that shares the vision and values of your Seller.
- Price Today for Payoff Tomorrow: Educate your Seller that receiving a fair price today, allows them to benefit from a grander payoff in the future - as they need to create some up-side to the Buyer. When pitching them on the Buyer, present the synergies and resources your new partner brings to the table. Even getting the Buyer to present a short 1-2 page executive summary about their background, operational expertise, and their ideas for growth can go a long way.
Wrapping It Up
Roll-over equity isn't a one-size-fits-all strategy, but for the right Buyer-Seller combo, it can be a golden opportunity for a lucrative "second bite of the apple." Before leaping in, do your homework:
- Confirm with the Seller that rolling over equity makes sense for their goals + ambitions. Pitching them on this concept without 100% buy-in will ultimately result in a lot of wasted time and a frustrated Buyer.
- Consult with the Seller's accountant and lawyer to ensure the business is correctly set up for this strategy.
- Chat with a seasoned business broker to gauge the feasibility of this strategy and see if they have a Buyer that would be a great fit (pro tip: join Business Broker HQ to chat to a community of leading-class brokers).
Join us again (surprise) for Day 25 where we dive into the taboo subject (gasp) of Broker Work-Life Balance*
If you want to learn more about automating your business brokerage with DealBuilder, please visit our site or book a demo here.
*We recognize the irony of the guy writing 30 articles in 30 days (often posting at midnight) that one of these articles is about work-life balance. Just trust us on this one.
