Why founder liquidity matters

Owners of successful businesses often face a situation where their net worth on paper grows significantly, yet their access to that wealth is limited and tied up in the business.   

At the Australian Business Growth Fund (ABGF), we believe that if a business has reached a certain level of success over several years (i.e. achieved profitability milestones), and it has significant growth potential, owners should be able to ‘take money off the table.’ 

Opting to take money off the table through a partial sell down of shares to a minority investor, rather than a majority sale, allows an owner to secure both an immediate financial benefit while also maintaining the potential for significant financial gains from the future success of the business.

Furthermore, this success is likely to be achieved sooner with the support of an active and experienced investor.  

The transformative power of partial liquidity

Let us be clear: taking money off the table, otherwise referred to as ‘partial liquidity,’ is good for a business.  

Why? Without a liquidity event, a founder’s appetite for risk may change from maximising growth (i.e. how big can I grow this business) to preserving wealth (i.e. how can I protect the wealth that I have already built). This shift can occur because a sizeable portion of an owner’s net worth is likely tied up in the business as it grows. 

In times of economic uncertainty, the emphasis on preserving wealth tends to increase, highlighting the critical need for alignment among shareholders about their risk tolerance. Such an environment can prompt cautious strategic choices, as the personal wealth of founders is often closely tied to their business. Facilitating avenues for owners to achieve partial liquidity, coupled with the support of a seasoned investor, can pave the way to more ambitious expansion strategies.  

Additionally, after a partial liquidity event, founders have the cash to pay for life’s major financial commitments — like investing in their children’s education or paying down their mortgage — providing further personal financial options and security. 

Achieving liquidity

Liquidity can be achieved through various financial transactions, each with its unique implications for the founder’s future and the business’s growth prospects. 

Ultimately, a founder’s level of liquidity achieved in a transaction depends on how much of their business they sell as part of a full sale, majority, or minority transaction, as well as how it is structured. 

Full sale
This offers complete liquidity and is ideal for founders ready to immediately transition away from their business. However, it also means relinquishing potential future gains and control.  

Majority sale
A majority sale strikes a balance, offering substantial liquidity while allowing founders to benefit from some future growth and retaining a role in the business.  

This option suits those seeking financial security alongside a continued, albeit minor, stake in the business’s future. However, this option means relinquishing control and some upside from a future liquidity event. 

Minority sale
This is best for founders aiming to de-risk financially while maintaining a central role in the business.

A minority sale sets founders up for a long-term role at the company. And with the support of an experienced and active investor by their side, together they can fast-track the growth of the business. 

The dual pay-day with a minority sale

Irrespective of personal considerations, would a founder be financially better off with a complete sale of their business or a minority sale to an experienced investor? Let’s consider a hypothetical scenario and compare these two examples.   

In Example A the founder sells 100% of a business with an enterprise value of $35m (including $5m debt). In this example, the founder makes a complete exit from the business and receives a payout of $30m — $25m of cash and a $5m performance-based earn out.

In Example B, the founder takes partial liquidity now and then a full sale later. This is referred to as a ‘dual pay-day’ structure. In this scenario, the founder sells a portion of their equity to a growth capital investor for an instant cash payout of $10m. This immediately de-risks their personal financial situation. As the investor is experienced in unlocking business growth, they bring the necessary capabilities and connections to significantly accelerate the business’s progress, enabling it to reach growth milestones faster.

Because the founder has retained a majority stake in the business, they are a beneficiary of the business’s further growth. In this scenario, just four years after the initial liquidity event, the founder could potentially receive a further $45m of cash in a full sale of the business. Across the two liquidity events they receive a total of $55m in cash.

Example B is only made possible by partnering with an experienced growth capital investor who believes in the founder’s vision and offers a collaborative pathway to scaling the business.  

Liquidity and alignment

Providing founders with the option to initially take money off the table so they can enjoy the upside of further growth in the future can enable them to be more ambitious about the business’s growth trajectory.

This mindset also aligns with ABGF’s mandate. ABGF is Australia’s only purpose-built growth capital fund dedicated to investing in Australian entrepreneurs, disruptors and growth-oriented businesses. ABGF supports ambitious founders who want to partner with an active investor, accelerate the business’s growth and establish sustainable foundations for a liquidity event in the future.

Founder liquidity matters. Simply put, partial liquidity offers a compelling pathway for founders to achieve both financial security and future financial prosperity, while aligning incentives with long-term growth-focused investors.

ABGF engages in proprietary trading for its own account, does not hold an Australian financial services license and does not provide financial product or investment advice, or any other financial services, to investee entities. Anyone who makes a decision to engage in a transaction with ABGF will be required to acknowledge and agree that it will make its own independent decision to enter into each transaction and each transaction is appropriate based on its own judgement and advice from such advisors that it deems necessary. 

Can ABGF assist your business?

The Australian Business Growth Fund (ABGF) is an active provider of patient, minority growth capital for Australian businesses with over $2 million in revenue and a proven business model.

It only takes a conversation to understand if your business is ready for growth capital with ABGF.