What Is a Controlling Interest?The term controlling interest refers to a situation that arises when a shareholder or a group acting in kind holds the majority of a company's voting stock. Having a controlling interest gives the holding entity(s) significant influence over any corporate actions. Shareholders who have a controlling interest are often able to direct the course of a company and make the most strategic and operational decisions. Show
Key Takeaways
Understanding a Controlling InterestA controlling interest is, by definition, at least 50% of the outstanding shares of a given company plus one. However, a person or group can achieve a controlling interest with less than 50% ownership in a company if that person or group owns a significant portion of its voting shares, as not every share carries a vote in shareholder meetings. Having a controlling interest gives a shareholder or group of shareholders significant influence over the actions of a company. A party can achieve a controlling interest as long as the ownership stake in a company is proportionately substantial relative to the total voting stock. With the majority of large public companies, for example, a shareholder with much less than 50% of the outstanding shares may still have a lot of influence at the company. Single shareholders with as little as 5% to 10% ownership can push for seats on the board or enact changes at shareholder meetings by publicly lobbying for them, giving them control. Voting rights allow shareholders to elect directors, change direction in the company, and express their views to management and directors. Advantages of a Controlling InterestThe upside of holding a controlling interest in a company can come in many forms. First, a controlling interest gives a person or group of people substantial influence. Since, by definition, the party with controlling interest automatically has the majority vote, it allows an individual to veto or overturn decisions made by existing board members. This gives people who have a controlling interest in a company the ability to take ownership of the operational and strategic decision-making processes. In some companies, if an individual has the controlling interest, the firm automatically makes that person the chair of the company's board of directors. This gives that individual even more power than the majority vote. In addition to retaining veto power over a board vote, the individual can effectively make board decisions on their own, including hiring C-level executives. A controlling interest grants an investor the leverage to increase their shareholding stake in a company in the event of a merger or acquisition. For example, in a strategic merger that involves a share swap, the investor who holds controlling interest would structure a deal that continues to give them majority voting power over the new entity. Real-World Example of a Controlling InterestMeta (Formerly Facebook)Facebook (now Meta) (META) founder and chief executive officer (CEO) Mark Zuckerberg has a controlling interest in the social media giant. According to Facebook's 2021 proxy statement, Zuckerberg owns about 360 million Class B shares. He also maintains control on voting for another 32 million with a total voting power of 57.7%. AlphabetGoogle's parent company Alphabet (GOOGL) structured its shares in a similar way to Facebook. Larry Page, Sergey Brin, and Eric Schmidt each have a controlling interest, owning over 60% of the company’s B voting shares that carry 10 votes per share. In contrast, the tech titan’s Class A shares have only one vote per share, while the company's Class C (GOOG) shares have no voting rights. Starting and building a business is a rewarding endeavor for many entrepreneurs, but it’s hard work. All businesses require capital, and some require a significant amount of it. Sole ownership may not be the optimal structure when it comes to transitioning leadership, so many business owners sell ownership in their company through shares of stock. Key Takeaways
Reasons to Sell Stock in Your CompanyThere are many valid reasons to sell all or part of a business. Selling shares in a business can generate significant cash, which can pay down debts or be used for investments or charitable donations. That cash can also go back into the business, where it can fund expansion. Likewise, selling part of a business can reduce the owner’s risk and allow them to diversify their personal assets. Business owners may have several other reasons to sell shares. Selling shares over time can be a means of preparing for eventual succession and transferring ownership in a way that minimizes the tax shock to the eventual new owners. Finally, selling shares in a business can be the end result of burnout or an unwillingness to grow the business further. Complete vs. Partial SaleFirst, you need to determine whether you are looking for a complete or partial sale. A complete sale is fairly straightforward. It more or less ends your involvement with the enterprise, unless there’s an employment or consulting contract that continues the relationship. Business sales can be structured in a way that essentially offers annuity payments, so a complete sale makes sense if the owner is looking to completely move on financially. Partial sales are different. They can raise capital, incentivize employees, or start ownership transitions. Before contemplating a partial sale, consider the ramifications of how much you wish to sell. If you sell too much and become a minority investor, you may no longer have the ability to control—or even influence—decisions. Different Options for SellingGoing PublicFor the large majority of business owners, going public is not an option. Pursuing a public listing for your business is the most expensive option, and it is the most demanding in terms of legal, auditing, and disclosure requirements. Still, it is generally the best option for raising large amounts of capital and/or maximizing the value of a business. Selling to Large Private InvestorsCompanies do not have to go public to attract investment dollars from institutions. It is considerably easier, faster, and cheaper to sell shares privately. While there are limits on the extent to which a company may solicit investors without filing with the Securities and Exchange Commission (SEC), private sales offer the same advantage of raising capital publicly without some of the downsides. Private sales usually include venture capital financing. In venture funding, a business or business owner sells shares to venture capital investors in exchange for capital that the business needs to grow or expand. In many cases, significant share sales to large private investors also require that the company give the investors a spot on the board of directors. Selling to Smaller InvestorsIn some respects, selling shares in your private business to small private investors is both more difficult and easier than selling to large, sophisticated investors. On the plus side, it’s easier to handpick the investors, and there are often preexisting relationships. These investors are also less likely to force some of the more consequential compromises that bigger investors may demand, such as board representation or a chief executive officer (CEO) replacement. On the other hand, smaller investors typically have less money, and the legal process can be more complicated. Selling to EmployeesSelling shares of your business to your employees is another option to consider. Establishing an employee stock ownership plan (ESOP) increases loyalty and retention and reduces a business’ cash compensation needs—such as awards or bonuses—that would otherwise be paid in cash. These contributions are usually tax deductible; however, selling shares to employees is not a practical option for raising capital. Important Steps in Selling a BusinessIf you’re pondering an exit, here are some steps to get started. Decide on Your FutureBegin by answering one question: How do you want to spend your time, money, and energy after you sell? Many people find this kind of soul-searching difficult and avoid it. Unfortunately, owners who enter negotiations with a potential buyer without a vision for the future rarely conclude the deal. Put your future life vision in a document, so you can refer to it when needed, and update it as necessary. Know What Your Shareholders WantThe next question to ask is: What do your stakeholders want from your company? Stakeholders include people whose actions affect the health of the business—employees, other owners, investors, and family members. The goals of these pivotal people will shape the future of the business, and a smart buyer will want to know and agree with their objectives before concluding a deal. Determine Your Business’s ValueNext, you need to establish a value for the business. This process may require the services of an accountant, an independent analyst, and/or a consultant. The entrepreneur has grown their business from an idea into an organization with employees, assets, intellectual property, and a reputation. It’s priceless—to the entrepreneur. Potential buyers will assign a price to the business and walk away if they consider the owner’s price outlandish. If you’re considering a sale to a third party, seek the assistance of a business broker, who will typically be experienced in finding a buyer, managing paperwork, navigating tax and other laws, and closing the deal more quickly than an entrepreneur selling a business for the first time. Determining your company's market value is an important step in selling your business. Market value can be determined by calculating the value of all assets or comparing your revenue and profits to other similar companies that have been recently sold. A broker will concentrate on the sale, allowing the entrepreneur to continue to focus on running—and maintaining the value of—their business. Once you have an idea of the fair value of the business, solicit multiple bids (at least three if possible). If the bids differ significantly from the owner’s idea of fair value, it may well be necessary to rethink the assumptions. It’s also worth mentioning that private businesses almost always sell at discounts to public companies, but a controlling stake is often worth a substantial premium to noncontrolling minority investors. Create a Marketing StrategyIt is also important to properly market a business that is to be sold. There are Internet sites that traffic in helping owners to sell their businesses, but owners need to be prepared to create their own sales materials. At a minimum, a well-formatted, one-page summary is critical, as is a more detailed package for serious bidders. These materials need to include items such as the sales, profits, and cash flows of the business, as well as a comprehensive description of the business and its assets. Get Your Business in OrderFinally, get the business in order before attempting to sell it. Just as a house needs a refresh before a sale, so does a business. Look for issues that will scare off potential buyers and fix them before opening the books for inspection. Remember that selling your business is a process that will take time. It is not a singular event but rather a process that requires many steps and areas of focus. Make sure that cosmetic details and repairs are attended to, prepare a thorough inventory and equipment list, and have multiple years of financial data and tax returns on hand. Other Details to RememberThere are several other key details to keep in mind when considering selling part or all of your business. Remember that it takes time. An initial public offering (IPO) or venture round of financing takes months to organize, and getting a good price for a private business can take a year or more. Patience is vital; the more you rush to sell, the worse the prices you’ll see. Chris Snider, CEO and president of Exit Planning Institute, a national organization that trains financial advisors on the fundamentals of selling a business, says that selling should be treated like retirement and started early. “Exit planning is a process, not an event,” Snider says. “It’s a way of running your business that maximizes its value and provides a means of achieving an owner’s personal and financial goals.” As good as Snider’s advice sounds, many entrepreneurs fail to follow it. Instead, they treat selling their business like an event approached when they are ready to retire, burned out, or facing an unexpected life change. It’s also important to contemplate and plan for the tax and cash flow consequences of a sale. Investors are likely to insist on more-rigorous auditing or reporting. What’s more, if you sell shares with the promise of regular dividends, you need to prove the cash flow to support them. Consult with accountants and/or lawyers regarding the potential tax consequences of a sale—both to you and the business. Finally, don’t forget to consider the psychological implications. Are you ready to walk away? Are you prepared to have new partners questioning your decisions? Having investors in your business makes you legally accountable to others and requires more transparency than a sole proprietor may be accustomed to. What Is Equity Financing?Equity financing is a form of raising capital for a business that involves selling part of your business to an investor in return for funds. When a business owner raises money for their business needs via equity financing, they relinquish a portion of control to other investors. Is It Smart to Sell My Business?Knowing if selling your business is a smart decision depends on many factors, most of which will vary for each business owner. If you are no longer interested in managing your business, if the demands are too rigorous, if you are nearing retirement, or if you need money, are all smart reasons to sell your business. Of course, most of these reasons come with caveats and will depend on other related factors. How Much Should I Sell My Business for?A business is usually sold for two to three times the discretionary earnings range. So for example, if a business has cash flows of $300,000, the business will sell anywhere between $600,000 to $900,000. The Bottom LineSelling even a small part of your business is a serious undertaking. At a minimum, make sure you are thoroughly prepared and have clear expectations for the process. Selling shares in a private business can be a great way to raise capital, incentivize employees, or bring new talent and ideas into a business, but it requires patience, preparedness, and a willingness to negotiate. The best way to get the maximum value from selling your company is to plan well in advance. Take a hard look at what your business is worth and solve any problems that could make it sell for less than it should. Then take the proceeds and start on your next adventure. What would be a valid reason for naming a trust as the beneficiary?Naming a trust as a beneficiary is a good idea if beneficiaries are minors, have a disability, or can't be trusted with a large sum of money. The major disadvantage of naming a trust as a beneficiary is required minimum distribution payouts.
What is the purpose of key person insurance quizlet?The purpose of key person insurance is to mitigate the loss to the business due to the death of a key employee. All the following beneficiaries receive the death benefits exempt from probate: spouse.
Which of the following provisions guarantees that premiums will be waived if a juvenile life policy owner becomes disabled?A payor benefit provision is a provision under which premiums are waived in the event the policyholder becomes disabled or dies.
Which of the following is not an allowable 1035 exchange?So what is not allowable in a 1035 exchange? Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), and Qualified Longevity Annuity Contracts (QLACs) are not allowed because these are irrevocable income contracts.
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