5-Min Read
April 2023
Exit Strategy: Taking a “Second Bite of the Apple”
Taking a second bite of the apple is a strategy used in M&A that involves selling a portion of your business first and then selling another portion at a later time.
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Insight Details
Taking a Second Bite of the Apple
As a founder or owner, you have dedicated a substantial portion of your life to build your business. But there may come a time when you wish to consider exiting your business, either through selling all or a majority interest. Selling the entire stake in your business might imply that you are ready to invest all of your time in other interests.
However, selling a majority interest in your business to a strategic buyer or financial partner, in the world of mergers and acquisitions (M&A), can provide you with an opportunity to take a “second bite of the apple.” Let’s explore this concept in more detail and see how it can help you develop a successful exit strategy.
Taking a second bite of the apple is a strategy used in M&A that involves selling a portion of your business first and then selling another portion at a later time. The goal of this strategy is to generate gains from the initial sale and then sell the remaining portion of the business at a higher price later. This approach is often employed by sellers who wish to unlock equity value in an initial sale but remain on to lead their company with the full support and resources of the strategic or financial buyer – with the aim of achieving greater growth down the road. For instance, an owner might sell 75% of the company and roll the remaining 25% equity forward. In such a scenario, it would be conceivable that if growth goals were achieved and the time came to sell the remaining 25%, it would be worth more than the initial 75% sold – ergo a second bite of the apple.
Why is Taking a “Second Bite of the Apple” a Good Exit Strategy?
Minimizing Risks
Selling a portion of your business first can help you minimize the risks associated with continuing to navigate the complexities of market cycles, the need to scale, and increasing competitive dynamics, to name a few. By selling a part of the business, you get to take some chips off the table and de-risk, while joining forces with a growth partner to help you realize greater achievements. Again, this sets you up for a second bite at the apple.
Maximizing Profits
Taking a second bite of the apple can also maximize profits for your shareholders. By selling a portion of your business first and then selling the remaining portion at a higher price later on, you can generate more options for yourself and your shareholders. This approach can also help you fund future growth or other investments with the proceeds generated from the initial sale.
Flexibility
The flexibility provided through the pursuit of a second bite of the apple can be a significant advantage, as well. As a founder, you may be unsure about the future direction of your business, or the value of your business may be subject to significant market fluctuations. This strategy allows you to remain flexible and adapt to changes in the market as they occur, giving you more control over your exit strategy.
Retirement
Not every founder wants to fully exit their business. If you’d like to stay on and help run the business, this strategy helps you do so. You can take a step back as the main decision-maker, help the business grow with the help of funding from a private equity firm, for example, and reap the benefits of a later sale when the private equity firm chooses to exit themselves, which is usually within 3-5 years.
Large Scale Examples of Taking a Second Bite of the Apple in M&A
There are several examples of companies that have successfully used the taking a second bite of the apple strategy in M&A. One example is Amazon, which sold a 20% stake in its Chinese subsidiary, Amazon.cn, to China-based online retailer, JD.com, in 2015. Amazon then sold the remaining 80% stake to JD.com in 2018. By selling the stake in two stages, Amazon was able to minimize its risks and maximize profits.
Another example is PayPal, which sold its money market fund business to Federated Investors for $300 million in 2009. PayPal then sold the remaining portion of the business to BlackRock for $1.7 billion in 2010. By selling the businesses separately, PayPal was able to generate more profits for its shareholders.
Exiting your business can be a difficult decision, but taking a strategy, which contemplates a second bite of the apple, can be an effective way to maximize profits or proceeds and minimize risks. By selling a portion of your business first and then selling the remaining portion at a later time, you can test the market, generate profits, and remain flexible in your exit strategy. While this strategy may not be suitable for every company, it can be a useful tool for founders looking to exit their business in a profitable and strategic way – by unlocking the company’s value today and for a second bite.
Othon "O" Herrera
Othon ‘O’ Herrera has established a consistent record of strong returns over multiple business cycles at the C-level, across a range of industries for companies with up to $625 million in revenue, including navigating complex situations such as those requiring performance improvement, M&A, international expansion, turnaround, and transformation.
He has led M&A as a private equity backed consolidator leading to value creating exits for investors and shareholders. He founded Encore AMC taking the best investment banking practices from M&A firms he has hired throughout his career.
At Encore, Othon chairs the firm’s deal committee, while maintaining a direct presence on all the firm’s deal teams and transactions.
