Business Sale Discrepancies: Selling 51% for X Amount

Selling a portion of a business can be a complex process, particularly if you're selling 51% of the business. In many cases, the terms of the sale can vary significantly depending on whether the 51% is considered a personal asset or a corporate asset. This article will explore the differences in receiving a check for the amount of the sale or whether the funds go to the business as a whole.

Understanding Business Ownership Percentages

In the context of selling 51% of a business, it's crucial to understand the distinction between ownership of 51% and whether that ownership is considered a personal asset held by a single individual or as part of a larger corporate structure. If the 51% is owned by a single individual, or by a group of individuals (like a trust or an LLC that owns a controlling majority of the shares), then the proceeds of the sale would typically go directly to that individual or the entities they control. However, in cases where the 51% is part of a larger corporate structure, the funds may be distributed according to the company's governance and shareholder agreements.

Mergers and Acquisitions (MA)

In mergers and acquisitions, the term 'merger' typically refers to the combination of two or more companies, while 'acquisition' refers to one company buying another. When a corporation is involved, the funds received from the sale of 51% of a business will often go to the business entity itself. This is often because the corporate structure dictates how funds are distributed after a sale transaction. Shareholders or the owning corporation would receive the funds according to the specific terms of the transaction and the company's bylaws, shareholder agreements, and other legal documents.

Example Scenarios

Let's consider two example scenarios to illustrate the difference:

Scenario 1: Personal Asset Sale

Suppose a business owner, John, sells 51% of his shares in a privately held company to an investor. John, being the sole beneficial owner, would directly receive a check for the amount of the sale. This model is straightforward and common in privately held businesses where there is a clearly defined ownership structure.

Scenario 2: Corporate Structure Sale

In another scenario, if the same privately held company has a corporate structure with a board of directors and shareholders, and John is not the only shareholder, the sale proceeds might be allocated differently. For instance, John and other shareholders could agree to distribute the proceeds proportionally according to their ownership stake. Alternatively, the funds might be used to satisfy corporate debts or reinvested in the business. This scenario shows how corporate governance plays a role in the distribution of sale proceeds.

Key Considerations

When considering the sale of a portion of a business, several key considerations should be taken into account:

1. Ownership Structure

Understanding whether the 51% is owned by a single individual or a corporation is fundamental. This will directly impact who receives the funds from the sale.

2. Shareholder Agreements

If the sale involves a corporation, understanding the shareholder agreements and any pre-existing legal documents is crucial. These documents can stipulate the distribution of proceeds.

3. Corporate Bylaws and Governance

The corporate structure's bylaws and governance policies will heavily influence how the sale proceeds are distributed. Rules on how to handle the funds, what actions to take with the proceeds, and how they can be reinvested are all influenced by these documents.

Conclusion

The outcome of selling 51% of a business—whether the check goes directly to the seller or the business entity—hinges on the ownership structure and the existence of any corporate or shareholder agreements. When negotiating a sale, it's essential to have a clear understanding of these details to ensure that the proceeds are distributed as intended. Whether the money goes to the seller personally or the business, it's crucial to have a well-drafted agreement that spells out the terms and conditions of the sale.