Why founder liquidity matters

Owners of successful businesses often find their net worth grows significantly on paper, yet their access to that wealth remains 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 allows an owner to secure an immediate financial benefit while maintaining potential future gains. This success is likely to be achieved sooner with the support of an experienced investor.

The transformative power of partial liquidity

Taking money off the table, known as ‘partial liquidity,’ is beneficial for a business. 

Without a liquidity event, a founder’s risk appetite may shift from maximising growth to preserving wealth. This change happens because a large portion of an owner’s net worth is usually tied up in the business. 

In times of economic uncertainty, this focus on wealth preservation increases, highlighting the need for alignment among shareholders regarding risk tolerance. 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. 

After a partial liquidity event, founders have the cash to pay for life’s major financial commitments — like investing in their children’s education — providing further options and security.

Achieving liquidity

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

Full sale: Offers complete liquidity and is ideal for founders ready to leave their business immediately. However, it means giving up on any potential future gains.

Majority sale: Provides substantial liquidity while allowing founders to benefit from future growth and to retain a role in the business. It strikes a balance but involves giving up some control and a portion of the future upside.

Minority sale: Best for founders wanting to de-risk financially while maintaining control of the business and retaining a significant portion of any future upside. 

The dual pay-day with a minority sale

Would a founder be better off with a complete sale or a minority sale to an experienced investor? 

Consider this hypothetical scenario and compare the two options:

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

In Example B, the founder sells a portion of their equity to a growth capital investor for $10m, immediately de-risking their financial situation. The investor helps accelerate the business’s growth, and four years later, the founder could receive another $45m in a full sale. In total, they receive $55m across two liquidity events.

Example B is only 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

Allowing founders to initially take money off the table so they can enjoy the upside of further growth enables them to be more ambitious about the business’s growth trajectory. 

This 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. Partial liquidity offers a compelling pathway for founders to achieve both financial security and future prosperity while aligning incentives with long-term growth-focused investors.

For more information, visit our website. 

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.