Taking “Two Bites of the Apple”: Selling Part of Your Business While Staying in the Game

Selling a business is often seen as an all-or-nothing move, but for owners who want to diversify their wealth without walking away entirely, there’s another option: the “Two Bites of the Apple” strategy. This approach allows you to sell a portion of your business, gain liquidity, and keep a stake in the future growth. Whether through private equity, an ESOP, or a family transition, taking “two bites” gives you the best of both worlds. Let’s explore how this strategy works, the potential benefits, and key ways to take your first bite without giving it all away.

The “Two Bites of the Apple” strategy is a partial exit approach that enables business owners to take some cash off the table while retaining partial ownership in the business. This allows for a “first bite” through an initial sale and the potential for a “second bite” down the road when the business’s value has grown further.

• First Bite: Sell a portion of your business for liquidity, giving you financial freedom and reducing personal risk.
• Second Bite: Retain ownership of a stake in the company, benefiting from its continued growth and value appreciation.

This strategy is ideal for owners who believe in the business’s future potential and want to stay involved while reducing their financial exposure.

1. Diversify Wealth Without Leaving: By selling a portion, you gain liquidity to diversify your assets while still enjoying future business success.
2. Retain Influence: You can stay involved in strategic decisions, shaping the future of a business you’ve built.
3. Potentially Higher Returns: If your business continues to grow post-sale, your retained stake could be worth more when you eventually take the “second bite.”
4. Gradual Transition: A partial sale lets you transition out of day-to-day responsibilities at your own pace, giving you more control over the exit process.

One common “two bites” approach is partnering with a private equity (PE) firm. Private equity investors look for promising businesses where they can bring capital and resources to drive further growth.

• How It Works: You sell a portion of the business (typically 51% or less) to a PE firm, receiving liquidity upfront while retaining minority ownership. The PE firm often provides capital and operational support to help grow the business.
• Your Role Post-Sale: Many owners stay on in an advisory or strategic role, helping guide the business through its next growth phase.
• Second Bite Opportunity: When the PE firm eventually exits (often in 5–7 years), your remaining stake could be sold for a higher value if the company has grown.

Pros and Cons:

• Pros: Immediate financial gain, continued ownership, potential for greater future returns.
• Cons: Loss of control if the PE firm takes a majority stake, potential misalignment of values.

Example: Many founders in high-growth industries, such as technology or healthcare, take this approach, leveraging PE support to scale up and eventually cash out at a much higher valuation.

An ESOP lets business owners sell a portion of the business to employees, turning them into partial owners while allowing you to keep a stake.

• How It Works: Sell a percentage of the business to an ESOP trust, which purchases shares on behalf of employees. This can be done gradually, allowing you to take liquidity in stages.
• Your Role Post-Sale: As the owner, you can continue in your role or step back, gradually transferring responsibilities to the team.
• Second Bite Opportunity: Since ESOPs can be structured to purchase shares over time, you can continue to take chips off the table while keeping some ownership in the business.

Pros and Cons:

• Pros: Builds a loyal workforce, provides tax advantages, lets you stay involved.
• Cons: ESOPs require specific legal and financial structuring, can be complex to manage.

Example: Many small-to-medium business owners in industries like manufacturing and services use ESOPs to reward employees, reduce personal risk, and retain influence in the business.

For family-owned businesses, a gradual transition can combine taking “two bites” with passing ownership to the next generation. This lets you monetize part of the business while gradually passing ownership to family members.

• How It Works: You can sell or gift a portion of the business to family members, receiving a payout while retaining some control and involvement.
• Your Role Post-Sale: You might stay involved in an advisory or mentorship role, guiding the next generation as they take on more responsibilities.
• Second Bite Opportunity: If you retain a stake in the business, you could benefit from future growth and even consider selling your remaining interest at a later stage.

Pros and Cons:

• Pros: Allows you to keep the business in the family, maintain influence, and gain liquidity.
• Cons: Family dynamics and succession planning can complicate the process; requires clear communication and planning.

Example: Family businesses in industries like agriculture, retail, and real estate often use this approach to keep the company within the family while taking some financial security for the current owner.

Tax Implications

Each partial exit strategy has different tax consequences. Consulting with a tax advisor can help you maximize the financial benefits and avoid unnecessary tax burdens.

Structuring the Deal

For private equity and ESOP transactions, structuring the deal to protect your interests is crucial. Work with financial and legal advisors to negotiate terms that secure your role and preserve future value.

Cultural Fit

If partnering with outside investors or transitioning to an ESOP, consider whether the new owners or employees align with your vision and values. Cultural fit can affect the business’s long-term success and your comfort level in staying involved.

Preparing for Growth Post-Exit

Since the goal of a “Two Bites” strategy is to benefit from future growth, ensure the business is well-positioned to scale. This might involve establishing systems, hiring key talent, and developing a long-term strategy before bringing in partners or transitioning to employee ownership.

1. Balanced Financial Security and Upside Potential: By taking liquidity early, you gain financial security, reducing personal risk while maintaining a stake in future gains.
2. Continued Involvement and Legacy Building: You remain connected to the company, allowing you to influence its direction and shape its legacy.
3. Flexible Exit Timeline: A partial sale lets you transition on your terms, staying involved in a way that suits your evolving goals.
4. Increased Business Value: Bringing in new investment, whether through PE, ESOP, or family involvement, can fuel growth, increasing the company’s value for a potential future sale.

Taking “two bites of the apple” is a powerful way to transition from business ownership while maintaining a stake in the future. Whether you opt for private equity, an ESOP, or a family transition, this strategy offers financial security, flexibility, and the chance to stay involved with a company you’ve built. With careful planning and the right partners, you can enjoy the rewards of your hard work now and later, ensuring a smoother exit that maximizes your legacy.