Taking on a Minority Partner? 3 Things You’ll Want to Consider First– December 05, 2019 by Phil Ryan

I had the privilege of recently participating on a panel discussion as part of the ACG® Detroit Chapter’s “Driving Business Value” series. Ryan Boylan of Cohen & Company, Brendan Cahill of Dykema Gossett PLLC and Douglas Sutton of Huron Capital joined me to discuss flex equity, or flexible deal options.

Flexible deal options, which often revolve around taking on a minority partner in the business, allow a business owner to capitalize on record high multiples available in the marketplace while retaining ownership control and involvement in company operations. In addition to helping owners “take some chips off the table,” flex equity helps them grow operations, perform acquisitions or achieve other strategic objectives of the business.

The conversation among the panelists highlighted some important insights business owners should be thinking about when they decide to look for additional capital in the form of a minority stake partner:

1. It’s Not Just About the Money

Obviously, one of the primary reasons a business owner sells a portion of equity in their company is to obtain additional funding to expand operations, provide working capital liquidity, etc. However, what is often overlooked is the additional expertise a flex equity partner can provide. Whether an owner is expecting, or wanting, it or not, bringing on a flex equity partner means there is another voice around the table and someone else with an opinion and insights to share. After all, they have just purchased a share of the business, and most will want to have some level of input. While many owners may be resistant to new advice on how their “baby” is run, a flex equity partner’s insights and intellectual capital is often worth just as much as the money they bring with them — helping the business grow or turning it around.

2. Do Your Homework; Having the Right Partner is Key

Just like in any relationship, selecting the right partner is critical to long-term success. It can’t be emphasized enough how important it is for a business owner looking to bring on a minority shareholder to do their homework and really get to know the potential new investor. Look beyond the money they bring to evaluate the intangible factors a minority partner can add. Important factors to ask yourself when deciding on which flex equity partner to bring on include:

  • How involved is the partner going to want to be in the day to day or strategic decisions of the business?
  • How much involvement do you want, as majority owner, the flex equity partner to have?
  • How open are you to change; can you take constructive criticism?
  • What type of experience does the flex equity partner have that will be beneficial to the success/growth of the business?
  • What is the flex equity partner’s vision of where the company will be in three to five years, and how does that relate to your vision? Are your visions aligned?

These are just some of the many questions to vet carefully when considering taking on a partner. Entire businesses and relationships have gone up in flames when partners didn’t see eye to eye. Remember, entering into a business relationship with another party means you are putting much of your personal and professional equity at stake.

3. Protect Your Rights

It is critical for a business owner to protect their rights when taking on any partner, but especially so when taking on a flex equity partner, as the business owner still holds control. It is important to obtain the necessary help via legal counsel to ensure documents such as operating agreements, purchase agreements, etc. are drafted to maintain your rights as the owner. While it may not seem like a necessary step when consummating the transaction (no relationship is ever entered into with the thought it will eventually sour), taking the extra precautions upfront to ensure you’ve protected your rights could save you in the long run. The business world is full of examples in which business owners either have not had the right documentation in place or did not consult with legal advice skilled in this type of law — and lost their personal and professional fortunes and reputations as a result.

While the decision to give up equity to someone else can be daunting, keeping in mind these three points will help you through the process and help establish a successful and profitable relationship for everyone involved.
Contact Phil Ryan at pryan@cohencpa.com or a member of your service team to discuss this topic further.

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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.