Should You Retain Equity in Your Business Post-Sale?

When selling a business, one common approach is to cash out and walk away. But in recent years, another option has gained popularity, retaining a portion of equity post-sale. While this strategy allows owners to stay connected to the business and benefit from future growth, it also comes with its own set of considerations.

So, is retaining equity the right move for you? Let’s explore both the potential benefits and challenges.

The Benefits of Retaining Equity Post-Sale

1. Benefit from Future Growth

One of the primary reasons sellers consider retaining equity is the opportunity to profit from the future growth of the business. After the sale, if the business performs well or expands under new leadership, your retained stake could become more valuable.

This can be particularly attractive if the new buyer has resources, expertise, or networks that can accelerate growth beyond what you could have achieved on your own. Retaining equity can give you a second chance to cash out at a potentially higher valuation later down the line.

2. Signal Confidence to Buyers

When you retain a share of equity, it sends a strong message to potential buyers that you believe in the future success of your business. This can help build trust and reduce the perceived risk for the buyer, as you’re effectively keeping "skin in the game."

From an operational perspective, it can also provide continuity during the transition, reassuring employees, customers, and suppliers that you’re still involved—even if in a smaller capacity.

3. Immediate Cash While Reducing Risk

Retaining equity allows you to take some cash off the table upfront, while still maintaining a vested interest in the business. This strategy offers a middle ground between a full exit and continuing to carry all the risk on your own. You receive a payout but remain tied to the future performance of the business.

For industries that are poised for growth, or for businesses with unproven potential, retaining equity can be a way to secure some immediate returns while leaving the door open for larger future gains.

4. Involvement Without Full Responsibility

For some sellers, the idea of stepping away entirely is daunting. Retaining equity allows you to stay connected to the business and perhaps even stay on as an advisor or consultant. This can ensure a smoother transition for the new owners while giving you the chance to influence strategic decisions without the full weight of day-to-day operations.

Potential Drawbacks and Considerations

While retaining equity has its perks, it’s not without its potential downsides. Here are a few things to keep in mind:

1. Limited Control Over Future Decisions

Once you sell the majority of your business, even if you retain some equity, you will likely have limited influence over its direction. The new owners will make decisions based on their vision for the company, which may not always align with your ideas or preferences. This could lead to frustration, especially if you’re still emotionally connected to the business.

It’s important to understand exactly what role, if any, you’ll play in decision making post-sale, and how much influence your retained equity will afford you.

2. Uncertainty of Future Payouts

While the potential for future growth is a key selling point, it’s important to remember that it’s just that—potential. There’s no guarantee that the business will perform well after the sale, and in some cases, it may even decline. If the company doesn’t grow as expected, your remaining equity may not provide the financial reward you’re hoping for.

As with any investment, you should carefully consider the risks of holding onto equity in a business where you no longer have full control.

3. Tax Implications

Retaining equity may also come with tax implications, both at the time of sale and later when you eventually sell your remaining stake. Depending on your local tax laws, you could be subject to capital gains taxes or other tax liabilities when you exit the business fully.

Consulting with a tax advisor is crucial to understanding how retaining equity may impact your overall financial picture and whether the long-term gains outweigh the tax burden.

4. Potential for Extended Involvement

While staying connected to the business can be appealing, it also comes with the possibility of a longer transition period. If the new owners request that you stay involved during the transition or beyond, this could require more of your time and energy than you initially planned.

For some, this may feel like a burden, especially if the goal was to move on to other ventures or enjoy retirement. Be sure to set clear expectations about your future role and involvement before agreeing to retain equity.

Is Retaining Equity Right for You?

Retaining equity post-sale can provide an attractive balance between cashing out and staying involved in a business’s future success. However, it’s important to weigh the benefits against the potential risks and challenges.

For business owners who are confident in the future growth of their company and comfortable with taking a step back, this strategy can be a smart way to benefit from long-term success without the burden of daily management.

However, if you’re looking for a clean break or have concerns about giving up control, a full exit may be the better option.

Final Thoughts

Retaining equity offers a unique opportunity to stay connected to the future success of your business, but it’s not a one-size-fits-all solution. Carefully consider your long-term goals, your comfort level with risk, and how much involvement you want post-sale. With the right structure and clear expectations, retaining equity can be a strategic move that maximises both immediate and future value.