Majority Sale vs. a Minority Sale for a Business Owner in M&A

When we meet with prospective sellers contemplating a partial sale of their company, the natural bias is towards a minority transaction based primarily on what the terms “majority” and “minority” appear to indicate at first glance. To many, a majority sale implies a “loss of control.” However, there is more to it than that and must be weighed against seller objectives.

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Why a Majority Sale May Be Better Than a Minority Sale for a Seller in M&A

If you are a business owner who is considering selling your company or a part of it, you may have to choose between a majority sale and a minority sale. A majority sale is when you sell more than 50% of the equity of your company to a buyer, resulting in a change of control. A minority sale is when you sell less than 50% of the equity of your company to a buyer, resulting in partial ownership. Both options have their pros and cons but, in this post, we will focus on the advantages of a majority sale over a minority sale for a seller in mergers and acquisitions (M&A).

Higher Valuation

One of the main benefits of a majority sale is that it typically commands a higher valuation than a minority sale. This is because the buyer is willing to pay a premium for the control and the full ownership of the company, as well as for the synergies and efficiencies that they can achieve by integrating the company with their own. A minority sale, on the other hand, may have a lower valuation, because the buyer discounts the price for the lack of control and the potential conflicts with the seller. Therefore, a majority sale may allow you to maximize the value of your company and get a better return on your investment.

Full or Partial Exit

It's important to understand that a majority sale can still allow for an active role for the founder in operating the company if that is the preference. Majority simply means more than 50%. If you pursue a full (100%) exit, this means that you cash out all your equity and you are free from the responsibility and the liability of running the company. However, it is common for an owner to retain a minority stake in the business. This arrangement often keeps you at the helm, especially if the majority of the equity is purchased by a financial buyer (e.g., private equity group). This situation often results in greater financial outcomes for the owner(s) because the business will eventually be sold again and the value of the minority portion retained by the founder at the time of the downstream sale, when combined with funds earned from the initial partial (yet majority) sale, can be meaningfully greater than what a 100% sale would have produced. To learn more about this, read Exit Strategy: Taking a Second Bite of the Apple.

Strategic Partner

A third benefit of a majority sale is that it enables you to find a strategic partner who can take the company to the next level. A majority sale may attract buyers who have the resources, expertise, and network to grow and improve the company, and who share your vision and values. A majority sale may also create a clear and unified direction for the company, as the buyer has the sole authority to determine its strategy and goals. A minority sale, on the other hand, may limit the pool of potential buyers, as not all buyers are interested in partial ownership. A minority sale may also create a collaborative and cooperative relationship between you and the buyer, but it may also involve more communication and alignment challenges, as you have to manage the expectations and interests of both parties. In effect, a minority owner may, in the end, be more controlling. Why? Because minority owner doesn’t have to control, making things ripe for the minority partner to overcompensate. A majority partner will typically invest in the management team and be more inclined to collaborate with the seller’s leadership team.

Weighing It All

A majority sale and a minority sale are two different types of transactions in M&A, and they have different implications for you as a seller. A majority sale gives you a higher valuation, a full or partial exit, and a strategic partner, but it also means giving up control and involvement in the company. A minority sale gives you a lower valuation, partial liquidity, and a partner or an investor, but it also means retaining control and the influence in the company. The choice between a majority sale and a minority sale depends on your goals and preferences, as well as on the valuation and the potential of your company.

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Othon "O" Herrera

Othon ‘O’ Herrera has established a consistent record of strong returns over multiple business cycles at the C-level, across a range of industries for companies with up to $625 million in revenue, including navigating complex situations such as those requiring performance improvement, M&A, international expansion, turnaround, and transformation.

He has led M&A as a private equity backed consolidator leading to value creating exits for investors and shareholders. He founded Encore AMC taking the best investment banking practices from M&A firms he has hired throughout his career.

At Encore, Othon chairs the firm’s deal committee, while maintaining a direct presence on all the firm’s deal teams and transactions.