Mark Pestronk
Q: I am now the sole owner of my agency. A much larger agency wants to acquire 51% of my business, with my retaining 49%. Why would they want to buy just 51% and not 100%? Are there any advantages for me in retaining 49% rather than selling the business entirely, or will I just be outvoted at every turn? If there are any advantages, how should the deal be structured? I understand that the other agency does not want to buy my company's stock, so can they just buy 51% of each asset?
A: The potential advantage to you is that your upside would be unlimited. If you sold the entire business, you would be paid off, and then you would own nothing. On the other hand, if you retained 49%, you would theoretically be entitled to 49% of the profits as long as you owned the stock, which could be a very long time.
These kinds of partnerships are rare in the agency business, as few entrepreneurs want to become partners with others, let alone become junior partners. You need to make sure that the fit is right for you and that you are well protected.
Unless you have an airtight stockholders' agreement or the like, the majority owner could indeed control your company by outvoting you.
For example, the larger agency could prevent your company from showing any profits by charging a management fee payable to the larger agency.
I have to assume that the larger agency sees a relative bargain, in that it can acquire control of your company for just 51% of its value. Therefore, you need to provide for protections to ensure that you get treated fairly.
There are at least three ways to structure the deal, and you can provide for protections under any of these structures. None of them involve selling 51% of each asset, which would be very cumbersome.
First, you can sell 51% of your stock. I understand that, for whatever reason, the buyer does not want to do this, however.
Second, the parties could establish a new company, which would be owned 51% to 49%. Then, the new company could buy the assets of your corporation.
The new company could be a corporation or a limited liability company. If the former, you could be protected under a comprehensive stockholders' agreement, and if the latter, you would have an operating agreement that details each party's rights and duties.
Third, the larger agency could buy all of your agency's assets, and you or your company could have a management agreement setting out your rights, including the right to 49% of the profits.
It would be vital to provide for a clear definition of profits and to exclude expenses that benefit only the larger agency or only yourself. For example, if you have been expensing the cost of vacation travel, you would probably need to stop that practice.
In case of disagreement about the amount of profits, you should provide a mechanism for dispute resolution, such as mediation or arbitration.
Ideally, the agreement would allow you to continue to manage your location and to make most or all day-to-day decisions, so that you could maximize profits and ultimately benefit more than if you had simply sold your company outright.