December 13, 2019  
 
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Selling a Business

 

Selling Part of a Business

Many business owners don't want to sell their companies. When this is the case, it's worth considering whether selling part of a business might be a more palatable option.

Selling a business doesn't have to be an all-or-nothing proposition.

Many businesses can be split up into subcomponents, which can be sold separately.

For example, a marketing firm that does PR and web design could be split into two companies, a PR firm and a web design firm. Suppose that the founder of the company loved web design but was tiring of owning a public relations agency. By splitting the marketing firm in two, the owner would have the option to keep the web design company while selling the PR firm.

Splitting a company into two pieces or more and selling off some of the parts makes sense in a variety of situations. The original owner gets access to cash from the sale that can be used to fuel the remaining business line to higher levels of growth. At the same time, the new owner may put new money and energy into a business that might otherwise languish.

Of course, a big concern of the owner who buys the spun-off business is that the original owner will not reenter the business and compete with them. For that reason, spin-off deals like the one discussed above often require the selling business owner to sign a non-compete agreement.

If you plan on selling part of a business, it's best to split the businesses up as soon as possible. Otherwise, it will be hard for a buyer to truly understand the business history as a standalone entity and what the future potential is.

Bigger Companies Use The Same Strategy

When a small business owner splits a company in two, they are taking a page out of the playbook of larger companies. As an example, Motorola is one large company that is, as we write this article, in the process of splitting in two, with one business to focus on cell phones and television set-top boxes, and the other on enterprise networking. Their belief is that the sum of the parts, after the split-up, will be greater than the current value of the whole.

This is essentially the same bet made by a small business owner who splits a company up. They believe that they will be better off in the long run if they sell off part of the business.

The Business Buyer's Perspective

Buyers who have the opportunity to purchase a spun-off business should evaluate the deal with a heightened level of due diligence. The buyer will want to make sure that the owner isn't divesting part of his business simply because it doesn't have good prospects for the future, for reasons that are known only to the seller.

Always look before you leap when buying a business, but look a little bit more intently when buying a business spin-off.

Related Articles

Want to learn more about this topic? If so, you will enjoy these articles:

Entrepreneurial Exit Strategies
Selling to Competitors
Understanding IPOs


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