Mark Pestronk
Q: A much bigger agency's owner has approached me with a novel partnership arrangement. Instead of buying all the stock or assets of my agency, the buyer would buy just 51% of the company for a price equal to 51% of a mutually agreed evaluation for my entire agency. I would be left with 49% and a long-term employment contract to manage my agency, although the buyer would have the last word in cases of controversy. I don't really see why I would settle for 51% when I could potentially sell to someone else for 100%. Do you see any advantages to this deal? Also, since the buyer doesn't want to buy the stock of my agency, how do I sell just 51% of my assets?
A: The structure you describe is one I have seen several times in the last year, and it seems to be growing in popularity. It can work if you don't want to sell your agency and retire soon but instead would like to stick around for at least several more years.
It requires certain conditions in order to be successful:
First, the bigger agency must have better supplier deals than you have. Second, the parties must feel that they can trust each other before agreeing to anything. Third, you must be comfortable with the idea of having a partner. Fourth, the price for the 51% must be fixed and paid upfront; otherwise, you will come to feel that the buyer is paying you with your own money.
Here are the advantages for sellers in these deals, which I will call "51/49 joint ventures":
First, you'll be able to put a substantial amount of money in your pocket at the closing on the sale of the 51%. The upfront payment will probably be more than 90% of sellers get at closing when they sell 100%, as most outright sales involve installments.
Second, you can take immediate advantage of the bigger agency's supplier deals, bringing more profit to the bottom line. Although your ARC location won't qualify as a branch of the bigger agency, there are ways around this limitation, and your buyer has probably thought them through.
Third, you can potentially cash out for more than you could today. To secure your future, the deal should typically give you the option to sell your 49% to the bigger agency at any time you want to retire starting in about five years. The purchase price should be fixed at a multiple of your agency's profits in the year of sale, meaning that your 49% should be worth more than it is today.
Fourth, your downside can be protected in a no-cut employment contract, with a good salary that is guaranteed no matter how bad business gets.
You can transfer 51% of your agency's assets as follows:
First, the parties set up a new limited liability company, and you transfer all your assets to it tax-free in return for 100% of the ownership units.
Second, you sell 51% of your ownership units to the bigger agency. All steps are taken simultaneously.
The agreement between the two owners would then spell out each party's rights and duties.