Should I Retain Ownership After Selling My Business?

Contractors are increasingly presented with some version of this proposal: “We’ll buy most of your company, but we’d like you to keep some ownership.”

This can be a very good deal. It can also leave you with a substantial amount of money tied up in a company you no longer control.

The structure is commonly referred to as retained equity or rollover equity. Instead of receiving 100% of the purchase price in cash, the seller retains or reinvests a portion of the value into the post-sale company, usually as a minority owner.

Is Retaining Ownership a Smart Decision?

Sometimes — but only if you evaluate the second investment as carefully as you evaluated the first sale.

Decision #1: Would I sell my company to this buyer for these terms?

Decision #2: If I had cash sitting in the bank today, would I voluntarily invest that money in this buyer, this management team, and this business plan?

If the answer to the second question is no, the seller should be very cautious about retaining a significant percentage of ownership.

Potential Advantages

A second opportunity to create wealth — The seller can take substantial money off the table today while still participating in future growth. If the buyer brings stronger systems, capital, management, acquisitions, or expansion opportunities, the retained equity may become substantially more valuable in a future sale.

Alignment with the buyer — Retaining equity gives the seller an economic reason to help the company continue succeeding and can demonstrate confidence in the future of the business.

An easier transition — If the seller remains involved for a period as a president, consultant, board member, or business-development leader, retaining ownership can provide both financial and psychological continuity.

Potential tax considerations — Certain properly structured transactions may offer tax-deferral opportunities on the rolled portion. This is highly dependent on the transaction structure and should be reviewed by qualified transaction tax and legal advisers.

Potential Disadvantages

Loss of control — A seller may retain 10%, 20%, or 30% of the economics while having limited authority over what happens to the investment. The majority owner may change pricing, management, compensation, strategy, debt levels, acquisitions, distributions, or other major decisions.

Liquidity risk — Minority ownership in a private company generally cannot be sold whenever the owner wants. The timing and mechanism for a future exit need to be understood before the transaction is completed.

Dilution — Future capital raises, acquisitions, incentive equity, or restructuring may affect the seller’s percentage or economic position depending on the governing documents.

Ownership does not equal authority — A former owner may still own a meaningful percentage and even continue working at the company, but that does not necessarily provide an equivalent percentage of decision-making authority.

The Most Important BBC Question: “Twenty Percent of What?”

A contractor may hear, “You’ll still own 20%,” and assume the meaning is straightforward. It may not be.

Twenty percent of the original operating company is not necessarily the same as 20% of a larger holding company. Twenty percent of common equity may not have the same economic rights as another class of ownership. Twenty percent with voting, information, distribution, and exit rights is different from 20% without those protections.

The percentage alone does not tell you the value of what you are retaining.

Questions to Answer Before Retaining Equity

• What exactly will I own after closing?
• Am I retaining ownership in my original operating company or receiving equity in a larger holding or platform company?
• What class of shares or units am I receiving?
• Does the buyer hold securities or ownership rights that are economically senior to mine?
• Can my ownership be diluted?
• Who decides whether profits are distributed or reinvested?
• What financial and operating information am I entitled to receive?
• Do I have voting rights, board representation, or board-observer rights?
• When and how can I sell my remaining ownership?
• Are there put rights, call rights, tag-along rights, drag-along rights, or other exit provisions?
• What happens to my ownership if I retire, resign, become disabled, die, or am terminated?
• Can the buyer force me to sell my interest, and if so, how will the price be determined?
• How much debt will be placed on the business or holding company?
• What is the buyer’s track record with similar contracting companies?
• What happens to my retained equity if the buyer’s growth strategy fails?

When Retaining Ownership May Make Sense

Retaining ownership can be attractive when the seller receives enough cash at closing to accomplish personal and family financial goals; genuinely believes in the buyer and management team; sees meaningful future growth potential; understands the buyer’s financing and strategy; and has negotiated reasonable minority-investor protections.

When to Be More Cautious

A seller should be especially cautious when the retained equity is necessary to fund retirement, the seller does not trust the new management team, the financing structure is not understood, the seller wants a complete emotional and operational exit, the governing documents provide weak minority protections, or the retained ownership is being proposed primarily because the buyer cannot fund more of the purchase price at closing.

Think Like an Investor, Not the Former Owner

Selling 80% of your business and keeping 20% does not simply mean you sold 80% of the company. In most structures, you have also sold control.

From that point forward, you need to stop thinking only as the owner who kept a piece of his company and begin thinking like an investor who has placed part of his wealth under someone else’s management.

The question isn’t whether you believe in the business — you already proved that by building it. The question is whether you believe in the people who will control it after you’re gone.

BBC — Building Better Contractors

Retained ownership can create an extraordinary second financial opportunity, but it should never be accepted simply because the percentage sounds attractive. The seller needs to understand the economics, control, debt, governance, liquidity, tax consequences, and exit provisions before making the decision.

BBC believes the goal is not merely to negotiate what percentage an owner keeps. The goal is to understand exactly what that ownership represents — and whether it supports the life and financial future the owner is trying to create after the sale.