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Minority interest is defined as “a significant but non-controlling ownership of less than 50 percent of a company’s voting shares by either an investor or another company.” A minority investor can own a very small percentage or as much as 49.9 percent. In most cases, minority investors are not actively involved in the day-to-day PEO business.

Within a public company, minority shareholders are those who choose to own shares of publicly traded stock, and, in such cases, there are clearly defined regulatory guidelines that dictate appropriate disclosure and governance. For purposes of this article, we will focus on minority ownership in privately held PEO companies.

A PEO company would typically sell minority shares to raise capital and/or to bring additional expertise to the internal senior management team and board of directors. We most commonly see minority shareholders in privately held PEOs as part of an original investor group. The original investors often participated in start-up capital and were part of the PEO owner’s professional friends and/or family network. It is less common in our industry that minority shareholders are brought in years after inception. All shareholders or investors seek a return on the money they invest—be it in public stock or directly in a company. Minority investments are much less common in business service firms, such as PEOs than in companies with hard assets. Why? The ROI is more risky with companies who build the business on client relationships and contracts versus a company that holds tangible hard assets that can be sold quickly should the company, the economy, or the particular industry experience a worst-case scenario. For example, a manufacturing company that has a physical plant and machinery would be able to sell those assets if the company went out of business. The proceeds would be distributed to all shareholders based upon percentage of ownership. In the case of a business services firm, other than a few desks, chairs, and computers, there are no solid assets upon which a shareholder could be guaranteed monetary return.

Should you choose to seek minority shareholders, consider these words of wisdom:

Download the full article that was published in PEO Insider®