To Sell or Not to Sell?
By Maurie Cashman
Deciding whether to sell your business and if so, when, is one of the toughest decisions a business owner will ever make. Itâ€™s a similar crossroads to deciding to hold or sell another form of investment â€” involving a trade-off between control and value creation. However, it is also vastly different from a decision to sell any other form of investment. There is emotion involved. There are also much more complicated risks involved with the decision to hold or sell. It is, as Harvard Business School Professor Noam Wasserman has neatly dubbed it, the â€œRich versus Kingâ€ dilemma.
If you come to that fork in the road of trying to decide whether to sell your business, first realize this is a problem that most people would love to have. With that said, here are questions and thoughts you should consider to help determine whether it makes sense to sell:
Do you need to sell?
You can avoid this issue entirely by building a business with long-term value and, thus, extremely long hold periods. Build a business with sound and sustainable cash flow and you may be able to hold it for a very long time. A long-term-value-creating mindset tends to create fewer exit-timing problems for investors than a short-term-value-capture mindset. Building such a business requires you to create and execute plans for:
- developing talent that can manage the business in your absence;
- incenting those key people to stay with the business for the long term;
- creating long-term diversified customer and supplier relationships; and
- strategically investing in the people, processes and equipment that allow you to create and maintain that long-term sustainable cash flow.
How much can you increase the value of the business?
Estimate the difference between what you believe you can get now versus some realistic best-case scenario of what you might get. Once you have done that, factor in the time value of your money. That is, estimate how much the money you get now will grow and compare that number to the amount you hope to get in your best-case scenario. Trying to perfectly time the market peak for selling your business is foolish. Hungry pigs may get fat, but greedy ones get slaughtered.
Can you take some chips off the table while staying in the game?
Whether it is through a dividend, a recap, or a sale of part of your stock in a company, if you have a chance to realize some liquidity, seriously consider it. As J.P. Morgan said once, â€œI made all my money by selling too early.â€
What is the market context?
If many people are buying, it may be time to consider selling. One timeless lesson that remains is that if everyone is piling into something, it may be time to get out. Ask yourself if this is a buyerâ€™s or sellerâ€™s market. However, remember J.Pâ€™s caveat!
Do you really want to sell?
Ultimately, it is as much about what you personally want to do as it is about what dollar amount you might get. Will you be happy selling because you will be able to go on to a new venture? Do you not only feel that you could not only do more with this business, but that it is also what you love doing? Are you confusing selling with wanting a different role? Do you want to get out of the day-to-day grind but still be an owner? Perhaps you should be considering hiring a manager.
Separate your financial motivations for selling from the non-financial reasons. Write them down and discuss them with a close adviser or mentor. Answering each of these questions will help bring clarity to your thinking.
As Yogi Berra said, â€œWhen you come to a fork in the road, take itâ€.
Â© 2017 Aspen Grove Investments, Inc.