In some entrepreneurial circles, having sold out of a business is a badge of honor. You created something from nothing. You built a profitable business and your business was so attractive that someone wrote you a big check and bought you out. You’ve got a pile of money in the bank and now you’re free to start another business, retire or do whatever you what. It sounds great and it’s almost like an entrepreneurial badge of honor. In fact, some people are so eager to have an exit under their belt that they’ll sell their business prematurely or sell off one of their side projects so that they can say they’ve had an exit. An exit gives you street cred among your entrepreneurial peers and will put a pile of cash in your pocket, but there are a lot of downsides to selling a company that some founders don’t consider. In this post, I want to pump the breaks a little bit on the dream of selling a business for a big exit and share some reasons why you might want to hold onto your business if you’re thinking about selling or if someone approached you and told you that they want to buy your business.
Here are six reasons why you should resist the urge to sell your business.
1. You still get the money even when you don’t sell. When you run a profitable business, you get to keep the profits whether or not you sell the business. When you sell your business to another company and cash out, you’re effectively taking home the next several years of the business’s profit in advance because the person that buys the business from you is going to either pay you using the business’s profits or pay off the loan they used to pay you with your business’s profits. When you keep your business, you get to keep the profit as long as you own the business. When you sell the business, you might get three to six years of profit up front, but nothing after that. If you have a profitable business, it’s like you’ve won the lottery and have to choose between taking the lump sum or the distributions over 20 years. If you sell your business, you’re taking the lump sum. If you keep running it, you’re taking the 20-year annuity. Either way, you get to keep the money, it’s just a matter of when you get it and whether or not you’re patient enough to wait to get more money.
2. Your business gives you a platform. When you’re the owner of a profitable business, you have a level of credibility that other people in the business world don’t have. You can speak with a level of authority because you’ve been there and done that. You can be part of conversations that otherwise you might have no place being in. Your business also gives you a professional network of employees, business partners and acquaintances in your industry that you largely lose when you sell your business. If you want to do any kind of speaking, book writing or running for political office, I think it’s better to be the person actively in the game than be the person who sold their business five years ago and hasn’t done anything since.
3. Selling Your Business is More Work than Running Your Business. When you’re getting ready to sell your business and when you are negotiating with a buyer, you effectively have to do two different full-time jobs. You have to run your business like you normally would, but you also have to collect mountains of paperwork for the person buying your business. You expect that they want to see your financials and your tax returns, but they are going to want every bank statement, every credit card statement, every receipt, every contract, every employment agreement and pretty much any other document that relates to your business. They need to figure out if what you’re telling them is complete and accurate as part of their due diligence process and the way they do that is by looking at literally everything in your business. The process of negotiating with a buyer, finalizing a sale contract and doing due diligence is as much or more work than simply running your business. You basically have to plan to have two full-time jobs for a 12-18 months while you’re selling your business, so you may think you want to sell your business because you don’t want to work as much, but in reality, you’ll be doing much more work in the short term than if you simply hold on to your business.
4. You need something else to do when you sell your business. If you’re at retirement age and are ready to sail off into the sunset, play with your grandkids and travel, you already know what you’re going to do after you sell your business. If you’re in your 20’s, 30’s or 40’s, chances are you’re going to do something else for work after you sell your business and before you retire for good. A few years into the life of Facebook there’s a story about Mark Zuckerberg turning down an acquisition offer from Yahoo for $1 billion. His thought process was “I don’t know what I would do with the money from selling. I’d just start another social networking site and I kind of like the one I already have. So, why sell?” So, if you have future entrepreneurial ambitions and you’re already running a business that you like to run, you probably shouldn’t consider selling. If you are seriously considering selling your business, you should have a pretty good answer to “What do I want to be when I grow up?” after you exit your company. If you can’t answer that question, maybe it’s not time to sell yet.
5. Your monthly cash flow will likely decline after you sell. There are some personal finance considerations that come into play when you sell a business. You get a single massive check for your company, but you lose out on the monthly cash flow that your business generates moving forward. You then have to take the money from the sale and invest it to generate cash flow to live on. The cash flow generated by your investments will invariably much smaller than if you just held onto your business and continued to take out monthly or quarterly profits. Most financial advisers recommend withdrawing only 4% of one’s investment portfolio each year. If you sell your business for a 4x multiple and invest all of the proceeds, your cash flow will be 16% of what it was prior to your sale (earnings * 4x multiple of earnings * 4% withdrawal rate). You’ll still probably get a decent amount of cash flow from these investments, but you won’t be able to spend the same amount of money each month that you had before without eating into your principal investment balance.
6. Selling is a permanent solution to a temporary problem. If you’re thinking about selling your business, there’s probably something underlying that you don’t like about running it that’s motivating you to sell it. Maybe you don’t like dealing with your customers. Maybe too much of the business is reliant on you. Maybe you can’t ever get away and go on vacation anymore. I don’t know what problem you might be facing, but every business owner has aspects of their company that they don’t really like. Instead of selling your business to make the problem go away, just fix the problem with your business. This was me about a year ago. I was doing most of the software development myself. I was doing level 2 customer support. I was doing the bookkeeping work. I was scheduling all of the ads that get put in MarketBeat’s newsletter myself. It was just a lot of work on a daily basis. One inclination might be, “I’ve got too much work to do, I should just sell this business and get rid of it.” Instead, I thought “Who do I need to hire to make these problems solve themselves?” I hired Ryan to do software development, Will to do ad management and level 2 support and Maureen to do level 1 support and be my assistant. I’ve been able to solve the temporary problem of having too much to do by hiring people and now my workload is very manageable. I could have fixed the problem by selling my business so that it was someone else’s headache, but really the right answer was just to fix the problem in the business.
Of course, a lot of these points are generalizations and won’t apply to every business owner in every situation. It can be easy to myopically look at the pot of gold at the end of the rainbow when you’re thinking about selling and not consider the downsides of selling or reasons you should seriously consider holding onto your business. I hope these ideas give you a second perspective when invariably someone offers to buy your business.