For many business owners, selling their company is a momentous milestone – often the culmination of years of hard work, long hours, and strategic growth. What some may not realize is that the initial sale doesn't have to be the end of their financial rewards. In fact, many savvy entrepreneurs aim for what’s known as the "second bite of the apple", an opportunity to significantly increase their earnings after the initial transaction.
Here’s how the second bite works, why it matters, and how you can position yourself to maximize your financial success:
For more about the risks and what to know before "Rolling Equity" check out Director of Advanced Planning Andrew Lavoie's complementary blog post.
What is the "Second Bite of the Apple"?
Depending on how a business owner sells their company, they might expect to receive a lump sum payment for the business's value at the time of sale. However, in some transactions, the seller retains an equity stake or some form of continued ownership in the business post-sale. In these scenarios, the business owner is “rolling” part of their proceeds into the company that is acquiring them. This allows the seller to benefit financially when the company grows or is sold again in the future, potentially at a higher valuation.
This strategy is especially common when a private equity firm or strategic buyer acquires a majority stake in the business. They invest in the company to fuel growth, and when the business is sold again in a few years, the original owner – who still holds an equity stake – gets a “second bite” at the financial apple, potentially at a much higher valuation.
Note: Depending on how many times the business owner “rolls” a portion of their equity into the new scenario, they can have multiple “bites of the apple”.
Why Business Owners Consider a Second Bite
The first sale is often just the beginning of wealth creation for business owners. A second bite allows sellers to stay involved in the company, continue to guide its growth, and reap the rewards as it scales. Here are a few reasons why this can be a lucrative strategy:
- Higher Multiples on the Second Sale:
When you sell a portion of your company, particularly to a private equity firm or strategic buyer, the buyer typically aims to increase the company's value over several years. A private equity firm, for example, will often attempt to boost the company's profitability or expand into new markets, which can command a higher sale price the next time the business changes hands. Similarly, acquisition by a strategic buyer likely means a combined company with greater total revenue, which in turn tends to yield higher multiples on exit, all else being equal. Either approach could help cause your retained equity to be worth more when the second sale occurs. - Leveraging Growth Capital:
The new owners often inject significant capital to fuel growth. This might include expanding the product line, entering new markets, and/or acquiring competitors. Your retained equity allows you to share the upside of this growth without shouldering the risk and effort alone. - Continued Involvement in the Business:
For business owners who are not ready to fully step away, retaining some ownership offers the opportunity to stay engaged in the company. You might still serve as a board member, advisor, or part-time executive, contributing your knowledge and experience to the next phase of growth. Financially, it might make sense for you to take some “chips off the table” to secure your personal financial goals while you continue to enjoy building your empire. Just because you plan to sell your company one day does not mean you need to create a make-or-break scenario bumping up against your retirement.
Real-World Examples of the Second Bite
One of the most famous second-bites-of-the-apple stories is that of Michael Dell. After taking Dell Technologies private in 2013 with the help of Silver Lake Partners, Michael Dell retained a substantial equity stake in the company. A few years later, in 2018, Dell Technologies went public again at a significantly higher valuation, allowing Dell and his investors to profit immensely from the second transaction1.
Similarly, many founders who partner with private equity firms maintain a minority stake with the understanding that the firm will focus on growing the business for a few years before attempting to sell at a higher multiple. These founders might see larger financial rewards from the second sale than from the initial transaction.
Structuring for the Second Bite
If you're considering selling your business but want to capitalize on a second bite, structuring the deal correctly is crucial. Here are a few tips:
- Negotiate Your Equity Stake:
When selling a majority stake, ensure that you retain a meaningful equity position in the company. The size of this stake can vary, but it should be enough to benefit from the company’s future growth. - Align with the Right Buyer:
Not every buyer will focus on growth or aim to increase the business's value for a future sale. Make sure you’re aligned with a buyer, such as a private equity firm or strategic partner, that has a clear plan for scaling the business and taking it to new heights. - Understand the Growth Strategy:
Before agreeing to a deal, dive deep into the buyer's plan for growing the company. Will they invest in expansion, new markets, and/or product lines? Do they have the financial and operational resources to execute the plan? The more confident you are in their growth strategy, the more likely the second bite will be lucrative. - Set Clear Exit Expectations: Know the timeline for the second sale. Many private equity firms aim to grow and sell businesses within a 3 to 7-year period. Having a clear understanding of when the next sale might occur allows you to plan your involvement and manage your financial expectations.
The Strategic Advantage of the Second Bite
Selling a business is often one of the most significant financial events in an entrepreneur's life, but it doesn't have to be the final chapter. By retaining equity and planning for a second bite of the apple, business owners can continue to grow their wealth and stay engaged in their company’s future. The key is to structure the deal with care, align with a growth-focused buyer, and ensure you’re in position to capitalize when the next sale happens.
For business owners looking to maximize the value of their company over time, working with the right buyer does not only provide the opportunity for a second bite, it creates the opportunity for even more rewarding sale.
For more about the risks and what to know before "Rolling Equity" check out Director of Advanced Planning Andrew Lavoie's complementary blog post.
2024- 7029630.1 Exp 09/26