You have to know when to hold ’em and know when to fold ’em
The decision to sell your company is normally much more of a personal decision than an economic one. Owners need to have a personal reason to sell, like having something else they would rather do, like spend time with family, engage in a hobby, or address health issues.
Once an owner firsts thinks about selling, the next step is to think about factors unique to your company, the economy, changing technology, and your personal goals. Has it reached $5 million or more in sales? If so, it’s in the strike zone of many acquirors. If it’s still young and small, it has substantial risk, and you may be better off growing it to a size that diversifies the customer base and permits the creation of infrastructure so that a larger pool of buyers are attracted.
Where is your company on its growth and risk curve? Sometimes it makes sense to wait until growth starts to taper, so you can maximize profitability. Buyers will focus on a narrow range of EBITDA multiples that they will apply to your earnings based upon the size of your company. It’s important to get profitability as high as possible so that both numbers are at their highest possible level.
Then there is the health of the economy. Selling a company in 2009, or during any recession, isn’t the right timing. You always want to sell when credit is available to buyers, and your operating results are favorable. Market stability, measured by VIX, indicates a time of market calm.
Then there are your personal goals. Is there more you want to achieve from a personal gratification standpoint? Most of us entrepreneurs own our own companies because we have a passion. As long as that passion is in place, our health is good, we have balance in our life, have at least some wealth outside the company, and we don’t need the value inherent in the company for other personal or business reasons, then we should continue to enjoy what we do. The only caveat to that is if we really aren’t maximizing the value of the company and it would be worth more to someone else. Those situations do occur, and occur commonly.
The increasing rate of change in the world can blindside us, require us to re-engineer the company, or require skills, knowledge, or scale we don’t possess. Hiring the right talent goes a long way in bringing in fresh ideas. The entrepreneurs that survive long-term hire people smarter than themselves. Startups go through transitions, and if we’ve been fortunate enough to grow the company, there comes a time when we can’t do it all ourselves. To maximize the value of our companies, we have to make it self-sustaining, and able to live without us.
One of the best statements I’ve heard about raising children is that the goal isn’t to raise a good child. The goal is to raise a good adult. To do that requires that they can live without us, and many of us, at some level, are reluctant to let go. The same holds for our companies. If the company is dependent on us, it can’t possibly be at its best. Many private equity groups shy away from buying companies held solely by the founder. The PEGs have found that the founder holds on too tight.
We know an entrepreneur who has started and sold three companies and is now acquiring his fourth and fifth. The first three were ready to be harvested for one reason or another. The first two had started to see their growth and opportunities flatten out. The third met with changing industry conditions and he knew he was too small to compete, and he didn’t have the resources to make the acquisitions necessary to have the economies of scale to survive. So now he’s reinvesting in businesses with more defendable niches.
The easiest decision to make in the world of investment is the buy decision. The hardest is the sell decision. The exit planning process should start as soon as your company is operating successfully. When things have been really good, its hard to make the sell decision. But that is the best time to cash in your chips. Too many owners sell under duress, in the midst of a recession under very bad conditions. I’ve seen them walk away with nothing but a release of their personal guarantee where they could have retired a few years earlier quite wealthy.
Try to be as dispassionate about the sell decision as possible, and know that there are always other businesses you can reinvest in or other passions to pursue if the market is telling you its time to sell.
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