The Risk of Sole Ownership
Being the sole decision-maker, with the bulk of ownership,
raises the risk profile of the business. What would happen if
the owner got hit by the proverbial bus? By understanding how
to spread the risk, the owner, and his/her business would not
need to die too. The family and employees might appreciate that
spread of the risk!
A manufacturing company’s CEO was happily engrossed by
his business and making a great deal of money. Inspired by a
speech by Apple founder Steve Jobs, his dream became to grow
the company more. This CEO knew that he had the drive but he
worried about putting so much of his personal money at stake. He
could not afford to take the risk, but nor could he go to the public
markets at that stage. To help his company evolve, the CEO sold
75% of the company’s shares to private equity partners.
They helped build up the staff, create systems, and identify
acquisitions. Ironically, his 25% share ownership ended up giving
him more financial return than if he had kept 100% to himself.
How incredibly satisfying when the difficult path turns out also to
be the best one! Of course, if you’re following Steve Jobs’ advice
you also recall his risks vs. reward for growing Apple in the early
years—Jobs may have lost his spot at Apple for a decade, but he
says the company made it through that period due to the private
equity financial partners in place.
Private Equity Reduces Risk
For the company owner who has an advisory board or their
EMD advising them they are too risk averse, they might weigh up
the benefits of bringing onboard a private equity partner. These
financial experts know risk assessment and understand the
psychology of managers and owners. Their business is to analyze
the net present value of investments relative to the risk, but in
addition, private equity works within the behaviors of owners
and their teams and are familiar with the capital-allocation and
Private equity partners will be lured to the possibility of
growth. They catch a glimpse of the big fish in the dark water and
appreciate the gleam of its scales; they will pick up the harpoon
and take on the struggle, bleeding from holding the line, facing
unbelievable adversity to bring home the fish others can only
admire from the shoreline.
Remember that medical device company discussed
at the beginning of the article? They decided on private
equity partners and his EMD encouraged him to fess up to
the conservative nature of his personal and financial goals.
“I built this business in my garage and now it has to fly without
just me. Let’s get in partners and share the risk.” In the end he got
enough cash off the table to cover his retirement and compensate
for all the hungry years. But he was still able to stay around to
enjoy the new growth with the partners who brought valuable new
skills—vision, contacts, and patient capital through the storm.
Decrease Ownership But Gain Growth
The business owner sets the risk by the amount of shares
they sell to a private equity firm and the EMD is an expert on
assessing the value of the sale of shares. It is vital to realize that
you control the level of engagement and you have options – you
• 100% or 90% and walk away from the company. By selling
90%, you can keep shares and get some upside to the new
• 75% and keep some control but benefit from the skills and
Herculean effort put in by your new partners.
• 30% and take on a minority shareholder—but you cannot
expect these partners to be seriously hands-on for that
amount, advisory at best.
Private equity partners will not be motivated to do a great deal
of heavy lifting for just 30% of the rewards. Private companies
appreciate that the more ownership is shared by the investor, the
more effort they’ll make to help build revenues (see Figure 1).
Figure 1: Valuation and Future Value
When it is the owner’s money being put at risk, usually the
potential loss outweighs the potential rewards. Sole ownership
results in a bias against risk, yet for the owner, to retire with more
wealth, the winners have shown that risk is required. Sharing the
risk, whether by growing robust risk processes and practices
with an EMD and running it with the existing management team,
or bringing in private equity partners, both will improve your
company’s ability to grow. Sound growth is good for everyone -
even Mark Carney would agree.
For more information contact:
Controlled Shared Majority Sell
Ownership 30% 50% 75% 100%