Many owners of successful companies are, on paper, wealthy, yet most of that wealth is tied up in a single asset they do not want to sell. The business has grown, the owner is still motivated, and the next phase looks promising. At the same time, concentration risk is real. A single setback, in the market, in health or in the family, can affect everything at once.
Partial liquidity offers a middle path: releasing part of the value of the company while keeping control and continuing to build.
Why owners consider it
- Diversification. Reducing dependence on a single asset.
- Personal plans. Funding a property, family needs or other investments.
- Family fairness. Providing for family members who are not active in the business.
- Partner exits. Allowing a co-owner to step out while others stay.
- Motivation. Some owners find they take better long-term decisions once their personal security is no longer entirely tied to the company.
Route 1: Selling a minority stake to an investor
An outside investor buys existing shares from the owner. The company receives no new capital; the owner receives cash. This is sometimes called a secondary sale. The investor becomes a shareholder with rights agreed in a shareholder agreement.
Consider: The investor will expect information, influence on major decisions and, eventually, a route to exit. Because no money goes into the company, the investor's return depends entirely on the company's existing plan.
Route 2: A combination of primary and secondary capital
An investor buys some shares from the owner and subscribes for new shares, providing growth capital to the company. This can be attractive when the company has a clear use for capital and the owner also wants some liquidity.
Consider: Investors generally prefer that most of their money goes into the business. A larger secondary component may require a strong case.
Route 3: A recapitalisation with debt
The company borrows, and uses part of the proceeds to pay a dividend or buy back shares from the owner. The owner keeps full ownership but the company carries more debt.
Consider: This only suits companies with stable, predictable cash flows. Higher debt reduces flexibility and increases risk in a downturn. Lenders will assess the company carefully, and the tax treatment of distributions should be reviewed with advisers.
Route 4: A majority sale with a significant retained stake
The owner sells a majority but retains a meaningful minority and often continues to lead the business. This provides substantial liquidity while keeping a share in future value.
Consider: Control passes to the new majority owner. This is a larger step and suits owners who are ready to share decision-making.
Route 5: Gradual sale to management or family
Shares are transferred over time to managers or the next generation, often with vendor financing.
Consider: Liquidity is slower and depends on the company's continued performance. Structure, valuation and financing need careful thought.
How investors look at partial liquidity
Investors are generally comfortable with owners taking some liquidity, provided the owner remains committed. What concerns them is a seller who appears to be preparing to leave. Signals that reassure include the owner keeping a substantial stake, a clear growth plan, a strong management team, and an honest explanation of why liquidity is wanted now.
Key questions before you start
- How much liquidity do you actually need or want, and why?
- How much control are you willing to share?
- Does the company also need growth capital?
- How stable are cash flows, and could the company carry more debt?
- What is your horizon for continuing to lead the business?
- What are the tax and legal implications in your jurisdiction?
The last question deserves emphasis. The structure of a partial liquidity transaction can significantly affect its tax treatment, and the rules vary by country and canton. Specialist advice should be taken before any decision.
A common mistake
Owners sometimes pursue partial liquidity reactively, after an unsolicited approach, and accept the structure the investor proposes. Exploring the options deliberately, and choosing the one that fits your goals, typically leads to better terms and a better partnership.
Telling the story to your team
A partial liquidity transaction can raise questions inside the company. Employees may wonder whether the owner is preparing to leave or whether change is coming. A short, honest explanation, emphasising the owner's continued commitment and what the new partner brings, usually prevents uncertainty from spreading. Key managers should hear first, and directly from the owner.
How LXN works with owners
We help owners weigh the routes to partial liquidity and choose the one that suits their goals. Because we invest our own capital, we can in some situations be the partner who provides it, staying alongside the owner with a long-term view and hands-on support.
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