You are probably hearing other business owners refer to the term “the second bite” with a big smile on their faces. The second bite refers to the opportunity that arises after a business owner sells less than 100 percent of their ownership stake. By leaving chips on the table, business owners have the chance to partner with a private equity firm to accelerate growth and business value. This can lead to a second bite which comes during the next sale of the business.
At some point, many great businesses reach an inflection point: a time when the owner wants a partner who can help preserve and enrich the future of the business (and do it in the right way). When a business owner is selling and thinking ahead to a second bite (rolling equity and exiting again down the line), the three most important elements to focus on are:
1. Pick your dance partner wisely
It is essential to find a partner who is a good fit for your business and its growth. This partner will work with you for the next three to seven years.
To accelerate the business’s value, you have to bring in great talent, technology, and tools. The right business partner will help you make sure you invest in the right things at the right time.
You have to assess the following: Does your potential partner share and support your vision for the next growth stage? Can they provide operational, financial, or strategic resources to accelerate growth? Do they have a track record of treating team members and founders well?
Just like when dating, make sure you learn all you should before you agree to get married.
2. Roll the dice
A lot has changed over the past 10 years, and now that capital is more founder-friendly, it means there are more opportunities for an owner to stay involved and “roll the dice.” It provides great outcomes for founders, and investors are more willing to partner with founders and create founder-friendly terms where they work hard on alignment while honoring the founder’s ability to take the next step.
Set clear expectations on the equity rollover terms, clarify governance and control rights, i.e., will they remain on the board or continue in an operational role, and define liquidity terms and a clear timeline for how and when to monetize the second bite.
3. Align on growth plans and your participation
Sellers and buyers must agree on how value will be created, whether through organic growth, mergers and acquisitions, or operational strategies. Also, the owner’s involvement can directly impact their second bite’s value. So, it’s essential to determine if you as the owner will be involved in day-to-day operations or you’ll be taking on a more strategic role.
The second bite is an opportunity we’re seeing more frequently now, and it’s here to stay. It’s an excellent chance for founders to stay involved and participate in that accelerated growth with their new partner.
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