How to sell a company via tokenization
Occasionally, there comes a time in business owners’ life when they want to sell their company or one of its units. While it’s believed to be a complicated, expensive, and challenging process, there’s also good news: you can use disruptive instruments of capital raising like tokenization not only to grow the business but also to sell it efficiently. Tokenization will allow you to complete this process effectively, ask for a better price, and most importantly, preserve the businesses’ heart and soul.
Should you sell a company at all?
Firstly, let’s clear a very common confusion. Selling a business and terminating your manager obligations, which means leaving the CEO position, are two separate orthogonal questions. This means that if you don’t want to be involved in your business on an operational level, it doesn’t necessarily mean the company must be sold; all you have to do is find a CEO to replace you. Likewise, it’s possible to sell the business but preserve your managing responsibilities, as, for example, it is sometimes done after corporate acquisitions of venture-backed companies.
There are two discourses you should take into account while making this decision.
- Personal considerations are a desire to receive a well-deserved remuneration for the hard work you have put into a given business. You can sell it for millions in order to either lead a financially secured and careless life or invest this money into your next project. Apart from this, you may also want to diversify your portfolio so that your net worth isn’t tied to the business only. By doing so, you will be less dependent on a single company, and, therefore, more financially secure.
- Business considerations for selling the company usually apply in the case of an intention to sell not the entire company but some of its units that do not longer fit into your corporate strategy. Those can also be directions whose development has become a burden and which you would like to withdraw from a corporate structure so that they don’t influence your financial rates, even though they can be absolutely satisfactory for other investors.
These considerations are similar to the ones you may have when considering doing an IPO. If you would like to find out more about the pros and cons of doing an IPO, please watch our other video “IPO: subtle nuances. Corporate finance, corporate governance and corporate strategy” on this matter.
Challenges of selling a business
Generally, business owners face the following problems:
- Finding a single buyer. Without any doubt, purchasing the whole business is expensive, so finding somebody who would be willing to purchase an entire company is a challenging task. Such a process can easily take up to a couple of years.
- Negotiating a reasonable price. Even if you manage to find a buyer and overcome the problem mentioned earlier, you must understand that such a client will have a lot of bargaining power because there’s no alternative buyer, accordingly, there’s no competition.
- Impossibility to sell only a part of a business. Most possible buyers are private equity funds or big corporations. While the firsts usually want to implement a turnaround strategy to increase profits, the latter want to fit it into their business strategy. It’s not uncommon for promising products to be abandoned at all after being purchased by large corporations, e.g. because it would cannibalize their existing business.
- Finding a buyer who wants to preserve a business is the last issue on the list. It’s absolutely normal to have an emotional attachment to the business and its idea after investing in it for so many years. If you want it to develop in a certain direction, grow a particular product or preserve specific values, an apparent conflict can lie in a different vision your potential buyer may have.
What is tokenization?
Tokenization is a combination of technical and legal processes that transfer the ownership of any asset into the form of tokens on the blockchain. Such an asset may be corporate equity, debt, real estate, or a financial instrument. Tokenization makes investing in these assets much more accessible because it allows breaking large, expensive items into small fractions, which are cheaper and may be conveniently purchased online. Such a benefit is called fractional ownership.
Usually, with tokenization, companies raise capital from numerous individual investors. Since a token can be divided into a number of smaller ones, it’s easy to sell those fractions at a much smaller price than the whole asset. Also, tokens are easier to trade than conventional forms of securities, making them even more attractive to investors.
How does tokenization help to sell a company?
- It becomes easier to find buyers. Thanks to the lowered investment threshold fractional ownership provides, you are no longer in need of searching for a big fish, which means a much larger pool of investors to choose from. Moreover, thanks to higher liquidity (i.e. tradability) of such tokens they become more attractive to investors. If you would like to find out more about why tokenized assets are more attractive to investors, read our article “Advantages of tokenized securities that matter to investors”.
- It’s possible to make a partial exit. One more advantage fractional ownership provides is the possibility to sell only one unit of the company or a specific part of it. If wishing to remain affiliated with the business in question is on the table, it’s a win-win option.
- Possible to negotiate a better price. Selling a token to a number of investors instead of a single one reduces the bargaining power of each one accordingly. Thanks to this, it’s easier to promote your own terms and conditions for the purchase. You can learn more about bargaining power, cost of capital and the main benefits of asset tokenization in our video “What is the biggest benefit of fundraising via STO? What is the cost of capital?” on the topic.
- Lastly, selling your company partially to smaller investors who invest no more than 10 or 20 thousand dollars usually means they don’t have any serious business agenda, thus, you keep all the bargaining power. They can’t influence your business direction from an economic or ethical point of view, and they are driven primarily by an opportunity to get extra revenue from a succeeding project.
Obviously, raising capital from new investors requires different approaches to marketing and finding investors. If you’d like to dive deeper into sophistications of STO marketing, read our article “Conducting an STO marketing and reaching out to investors”.
Stobox has cases of clients implementing tokenization as an exit strategy. Even a bigger number of them are using it to raise capital, grow their business, or launch new projects. If you’d like a more in-depth consultation on this topic, schedule a free 30-minute consultation with an expert on our website.