Why do Owner-operators Sell Their Business but Keep their Jobs

[randomep]

hi all, I am always curious what is the motivation behind private companies that agree to get bought out, but yet the sellers still stay to operate the business.  Warren really likes that and one notable instance is nebraska furniture mart.  In that case, the owner Rose Blumkin sold for $65M but stayed with her family to operate it (ya she got into a fight with her kin and opened a competing business across the street, but that is not the point).

another example is Tony Hsieh of Zappos, but.... why do they do that?  My impression is that they probably are selling whole, so what is the point of working there for a small salary to make someone else rich?  Is it to get access to more capital to expand? ?

any insight appreciated

[kab60]

Often these folks have 100 pct. of their net worth tied up in one place, like having 100 pct. of your portfolio in one idea, so selling reduces risk, takes off a lot of pressure and gives them the opportunity to exchange an illiquid stake into cash. Which can be used to improve the quality of life and/or be invested more broadly and decrease concentration risk. It's not very oftent that founders sell 100 pct. of their business and stay on for a long time and if they do hang around it's often because they have some of the payment locked up in a 3-year earnout or something like that.

Often when they sell to PE, founders keep 30 pct., which gives them skin in the game but also makes them more willing to take risk and expand, since they already took a lot of money off the table. So I'd say it makes a ton of sense for most people, and that it's fairly unusual founders stick around for a very long time when they sell 100 pct.

[villainx]

Often these folks have 100 pct. of their net worth tied up in one place, like having 100 pct. of your portfolio in one idea, so selling reduces risk, takes off a lot of pressure and gives them the opportunity to exchange an illiquid stake into cash. Which can be used to improve the quality of life and/or be invested more broadly and decrease concentration risk. It's not very oftent that founders sell 100 pct. of their business and stay on for a long time and if they do hang around it's often because they have some of the payment locked up in a 3-year earnout or something like that.

Often when they sell to PE, founders keep 30 pct., which gives them skin in the game but also makes them more willing to take risk and expand, since they already took a lot of money off the table. So I'd say it makes a ton of sense for most people, and that it's fairly unusual founders stick around for a very long time when they sell 100 pct.

Pretty much it.  Just wanted to add that there are too many uses for cash - including paying out working minority/family members, setting up inheritance, etc.

[MarioP]

They also stay because they love what they do. Money is not the only motivation in life

[bizaro86]

Having a valuable business be a huge percentage of your net worth can be financially stressful. Especially if the business is growing it probably doesn't throw off much cash if they're reinvesting.

[SharperDingaan]

For a lot of people it is much more basic; family either doesn't want to take-over the business, or just isn't up to it.
The founder sells to monetize their life's work, and continues to run the business for both health (mental/motivation/physical) reasons, and something to do. Done well, it's a second wind that works well for everyone, and which can take many well into their 90's.

Often great businesses to work for, as they have both industry brains, a deep bench, and the capital to do meaningful and successful innovation. Also a lot safer, as they've been through the business building process, survived it, and fully understand the inherent business risks in their industry. The buyer just needs to make capital available as needed, and stay out of their way. All about emotional intelligence.

SD
 

[villainx]

For a lot of people it is much more basic; family either doesn't want to take-over the business, or just isn't up to it.
The founder sells to monetize their life's work, and continues to run the business for both health (mental/motivation/physical) reasons, and something to do. Done well, it's a second wind that works well for everyone, and which can take many well into their 90's.

Often great businesses to work for, as they have both industry brains, a deep bench, and the capital to do meaningful and successful innovation. Also a lot safer, as they've been through the business building process, survived it, and fully understand the inherent business risks in their industry. The buyer just needs to make capital available as needed, and stay out of their way. All about emotional intelligence.

SD

I guess this is as good as any place to state survivorship bias, right?  Not disputing just easy to envision potential owner operators that fail once sold.  Uh, for my sake, I hope not too true.

[SharperDingaan]

For a lot of people it is much more basic; family either doesn't want to take-over the business, or just isn't up to it.
The founder sells to monetize their life's work, and continues to run the business for both health (mental/motivation/physical) reasons, and something to do. Done well, it's a second wind that works well for everyone, and which can take many well into their 90's.

Often great businesses to work for, as they have both industry brains, a deep bench, and the capital to do meaningful and successful innovation. Also a lot safer, as they've been through the business building process, survived it, and fully understand the inherent business risks in their industry. The buyer just needs to make capital available as needed, and stay out of their way. All about emotional intelligence.

SD

I guess this is as good as any place to state survivorship bias, right?  Not disputing just easy to envision potential owner operators that fail once sold.  Uh, for my sake, I hope not too true.

As with everything, it's a judgement thing.
With the very good businesses it's often invitation only, between two salt-of-the-earths, that know of each other. Survivorship isn't just at the business level, its also at the acquirer level. The bigger issue is settling on the 'when it's time to go' - strokes, deaths, inability to change, etc. all on the table. Tone and strain of the upfront conversation, typically determining outcome.

Like it or not when you are an owner/operator, you are in the people business. You only have two hands, so many hours in a day, and a family deserving of some of your time. You have to be comfortable with building things, by working through others, versus just trading bits of paper. Not for everybody.

SD

[LongHaul]

This is a great question.  They are already rich so it is sometimes a bit of a mystery to me.  The above responses I thought were excellent.

Sometimes the family may have internal issues and instead of lawsuits the cash out may make sense.   

I do like how many of the German and Japanese families have kept ownership over the long term in the family and quite often to very well.
Sometimes they have professional mgmt sometimes the family members run it.