Should You Take Some Chips Off the Table?

Capital raises can shape the future of your business. If not researched and prepared for properly, capital raises can be an incredibly confusing and time-intensive process. One of the biggest decisions that must be made early in this process is whether to sell a minority or a majority stake in the company.

We spoke with Andrew Sachs and Stuart Bassin of Sachs Capital to learn more about minority equity transactions and how taking chips off the table can impact your professional and personal lives.

How does raising minority equity affect your professional life?

Raising capital is the process of exchanging the parts or the whole of your ownership of the business in exchange for capital. When debating between selling a minority or majority stake, one of the first questions you ask yourself should be: “Who do I want to control my business?”

With majority equity, the investor gets to decide what role you and your employees play in the business because they possess the majority stake (50% or more). “By selling a majority equity position in your company, the investor even has the ability to fire you, the Founder,” says Bassin.

While every transaction varies slightly based on the partner you choose, most majority equity capital providers will want to be involved in the daily operations of the business. A minority equity investor, on the other hand, “tends not to look over your shoulder every day,” says Bassin.

Minority equity capital raises also give owners the freedom to explore growth strategies for the business without giving up control and decision-making power. “We see a lot of business owners who are not taking advantage of growth opportunities because they don’t want to disrupt the company’s cash flow,” says Sachs. “A minority equity investment, as compared to using debt, is great for growing a business because it doesn’t come with tricky repayment plans and covenants.”

If you’re not yet comfortable watching someone else make personnel changes, or if you simply aren’t ready to give up your day-to-day routine, minority equity is likely a better fit. If negotiated properly, you’ll be aligned with your minority equity investor to grow your company and you won’t have aggressive restitution timelines.  For example, Sachs Capital invests without a put or forced redemption right.  That means an investor only cashes out when you, the Founder, decides to sell.

How does raising minority equity affect your personal life?

Most CEOs’ professional and personal lives are closely intertwined. Studies show that when it comes time to transact, business owners are more focused on the effect a transaction will have on the business than they are on their personal success or family life. Despite these priorities, it’s important for business owners to recognize that raising capital can have a major impact on your personal finances.

“Most business owners have their entire net worth tied up in their business, which is an illiquid asset,” says Sachs. “Because of this, they assume a good deal of personal risk.” In order to reduce personal risk, CEOs can secure minority equity financing from investors in exchange for a stake in the company. For context, most business owners that the Sachs Capital team works with sell somewhere between 10% and 30% stakes in the business. By retaining control, you can keep your job, grow your business, diversify your net worth AND fulfill your personal goals like buying a second home.

For example, in a minority equity investment in The Cleaning Authority, the Sachs Capital team’s minority equity investment allowed one co-founder to take some of his personal wealth out of the business so he could grow his side business.

“With minority equity, the timeline for the business and for the CEO’s life remains in the hands of the CEO, not the other way around,” says Sachs.

While minority equity makes personal goals a reality for many business owners, it still has costs. Most minority equity investors will take a preferred equity position in your business, which means the investor has stronger protections upon a liquidation. If you want to retire on your own terms, for example, minority equity helps you maintain flexibility in exchange for your position in the capital structure.

How to prepare for your meeting with a minority equity investor

“As with any transaction, it’s important for business owners to prepare for minority equity transactions with the help of an advisor,” says Bassin. “To get the conversation off on the right foot, it’s essential to have clean financial reporting for at least 3 years and a plan for how the funds will be used.”

When crafting a statement about the business’s future, there’s really no “wrong” answer. Given the flexibility of minority equity transactions, investors will consider providing funding for a wide array of goals — from paying for a wedding, to expanding the business into new geographies.

“With preferred equity, it’s important to make sure that our interests are aligned with the owner and the management team,” says Bassin. “Of course, we perform standard due diligence and develop a relationship with the owner, but when we enter into a minority equity partnership, we trust that the business owner ultimately knows best how to operate their business.”