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SELLING A BUSINESS
“I made my money by selling too soon.”
—Bernard Baruch
Selling a business is as much of a strategy for growing wealth as launching or buying one. The decision to sell has everything to do with time—the time you spend running the business, the time you’d need to grow it, and market timing.
A packed scheduled is the biggest red flag telling you to sell. Remember, joining the New Rich is all about passive income. If you’re spending all your time running a company, it’s preventing you from generating other revenue streams. A lot of people lie to themselves about this. They think a project is passive when it actually eats tons of their time. If a company is truly passive and making you money, hold it. If it takes your time with no end in sight, sell.
Also look at growth. If numbers are flat or declining, sell. You may be tempted to push for growth, but that requires a lot of time. Or it requires you to hire a team and incentivize the team by giving them equity to grow it. You can do it, but it’s an art.
And just as important: market timing. If you get the sense that the market is overvaluing the space that you’re in, you might take advantage of that hype and sell. Cash in while it’s hot.
ONE SENTENCE I USE TO GET OFFERS WITHOUT SOUNDING DESPERATE
The old saying “You have to be bought, not sold” is just that—old. Forget the tired thinking that you can only get a great offer for your business if buyers woo you into selling. You need to make it known that you want to sell—with a reason people will believe—to get conversations going. Give this impression even if you’re only curious about the prospect of selling. Email a few of your competitors and say:
“I really need to sell the business to take care of some personal stuff. Want to chat?”
Leave it at that. This sounds desperate, but that’s the point. Your desperate vibes will get prospective buyers to engage in conversations that otherwise wouldn’t have happened. They’ll see it as an easy opportunity to take over a competitor that they won’t want to miss. And they’ll work on persuading their cofounders, teammates, and board to make an offer. That’s where you want them. Once they sell their team on the idea, they’re expected to get the deal done. If they don’t, it puts egg on their face. Use this to your advantage. Everyone wants to get a good deal and then brag about it to their team. If you can give the potential buyer an initial “discounted” price that makes them feel good, they’ll tell the world about it.
After they are hooked, you tell them others want to buy, thereby creating competition and getting them to increase their bid into a range you’d actually take.
Emotions start running high when prospective buyers issue a LOI. When they’ve reached that point it means they’ve persuaded their team to make an offer. They’ve taken the time to strategically think about the purchase; they’re naming a price; they’re naming a closing date. They’re visualizing what the company will be like when they own it.
This is the foreplay that happens when companies are pursuing each other. When I’m looking at buying companies, I know that once I issue an LOI I’m significantly more invested. I’ve learned more about the CEO, the company’s financials, and the systems the team uses. I can still walk away, but it hurts more to walk away at that point. That’s the state you want to get your buyers into.
Once you have a few LOIs you’ll have the power and the leverage to spark bidding wars. But how do you get prospects to push beyond that discounted price they thought they’d be getting? Keep them emotionally invested. I often give this response to an initial offer (when I believe it’s true) to spark emotions:
“I have two responsibilities: One is a fiduciary responsibility to my investors. The other is making sure my customers are happy. You’re at the top in terms of where I think our customers would be happiest. But financially, you have to increase your offer for me to feel I’m meeting my fiduciary responsibility to my investors.” (If you don’t have investors, say “advisers.”)
Making the higher price tag about the investors keeps the money conversation objective. The financials are what they are. You’re not just throwing out a pipe dream price. And mentioning customer happiness gets buyers thinking about personal fit and culture—intangibles that talk louder than money. Think about anytime you’ve shopped for a place to live. Weren’t you more likely to push beyond your budget if you walked into a place that felt just right? Suddenly you’re rationalizing the extra expense. It’s a totally human reaction and it works in business, too.
I used this technique when negotiating with a potential Heyo buyer in 2015:
Nathan Latka <█████████>
to Don
this is how phone conversation went:
Me: You are at bottom of the pole in terms of deal value.
Them: how much?
Well, I have two responsibilities: Financial and Customer. You are at the top in terms of where I think our customers will be happiest but you’re going to have to increase the deal value by a pretty massive amount.
Them: how much?
Me: You offered $200k, what is your best offer?
Them: ???
Me: I’m willing to give you a discount below the current best offer we have because you’re a good fit for our customers but you’re going to have to double or triple your deal size in order to get Heyo.com and it’s assets.
Jim: Let me talk to Mike.
----
They then countered with an LOI with $200k cash and 100k earnout (with terms that make it almost impossible that we’ll ever see it). Their offer is still too low. It needs to be more like $375k cash, 100k earnout. (still a financial discount – but they are best customer fit)
thoughts?
This conversation got them to triple their initial offer.
SELL PICKLES TO THE LETTUCE GUY
If you’ve never sold a company, it can be hard to know whom to approach with that initial email. Your first obvious group is your competitors. Most of them would love to swallow your business and get you out of the way. If you’re a local brownie shop, approach other bakeries in your neighborhood. Or look up a national brownie brand. You never know if they’re looking to expand in your area.
Another easy option is good old social media. It’s a great way to find potential buyers you’d never have known were interested. And it makes it easy for people to spread the word. Just post the same thing you’d write in an email to prospects:
“Hey, everyone, I really need to sell the business to take care of some personal stuff. Let me know if you or anyone you know might want to chat.”
This approach works best if you’re selling a small business doing less than $10K per month. Otherwise, think of companies that play around you. If you’re a software company that helps small businesses with invoicing, try approaching a company that processes payroll. Or a company like Vistaprint that helps small businesses create marketing materials and business cards.
Think of the market as a hamburger. There are several different but complementary players all around you like buns, tomatoes, onions, pickles, ketchup, cheese, and meat. If you’re a cheese and can’t find a direct competitor to buy you—another cheese—look for complementary companies, like the lettuce or the bun. Look around and understand what else your customers are buying. If they’re buying footballs from you they’re probably also buying air pumps. Maybe you can sell your football production company to the air pump company.
Also look at your product’s distribution channels as potential buyers. Matt Rissell cofounded the payroll software TSheets in 2006 but struggled to turn a profit during the company’s initial years. They didn’t see major growth until they started selling the software through the Intuit App Center, eventually making their way to a number one ranking. Fast-forward to 2017: Intuit bought TSheets for $340M.
Square and Weebly followed a similar track. Square cross-sold many of Weebly’s website-building products for years. In 2018, Square ended up buying Weebly for $365M.
Look at who is selling a lot of your products. If you’re paying someone a cut and they’re driving a lot of volume, you might offer to sell them your whole company.
So make sure to look at these three channels if you’re not sure where to start your hunt for a good buyer: competitors, other players in the same space (the hamburger), and distributors. You’ll likely find more options than you think.
SELL WHILE YOU’RE YOUNG AND HOT
By young, I mean you. By hot, I mean your company. (But it can’t hurt if you’re hot, too. You’d be shocked how many deals I get because of my hair.)
I learned this lesson the hard way with Heyo.com. Back in 2012, iContact offered me $6.5M to buy Heyo. At the time, all of our competitors were exiting with huge offers. Salesforce bought Buddy Media for more than $600M. Wildfire sold to Google for $350M.
Seeing those deals inflated my ego. I thought, If Mark Zuckerberg could turn down Yahoo’s billion-dollar offer to buy Facebook in 2006, and my peers were getting nine-figure deals, $6.5M was nothing. I could do so much better. At the time I was twenty-two years old and new to all of this. I didn’t try to negotiate or spark a bidding war. I just passed on iContact’s offer.
It was one of the biggest mistakes of my life.
Never underestimate the timing of a market. Salesforce bought Datorama in July 2018 for $800M. At the same time, Babak Hedayati crossed $15M in revenues and three thousand customers for his competing tool, TapClicks, which helps media companies like Scripps manage real-time reporting. Companies are using it for scalable deployment of client reporting, data aggregation and visualization, and workflow management to bring intelligence and automation to their operations. It would not surprise me to see Babak take advantage of market timing and exit for six to ten times his $15M in annual revenues in the near future.
I wish I’d realized how important market timing was back in 2011. Social media marketing platforms were hot at the time. That was obvious from all the deals happening around. But once my competitors got out of the game the market cooled. Google even shut down Wildfire in 2014. I’d completely missed my window to make a big profit because the cliché is true: timing is everything.
By the time I got another offer for Heyo, in 2016, it was much smaller. We got $300K for just a part of the company’s assets and the $1.4M that we had in the bank was returned to investors. I had to sell because the company was taking up all of my time. Being a young, single guy with no responsibilities, I knew that putting all my effort into one business was not going to make me rich.
MY PAY STUB: I WAS TWENTY-SIX, CEO
It would have been so easy to stay at Heyo. At twenty-six years old, I was making more than all my friends but I knew I could never get really rich off a paycheck. It’s funny looking back at when I was persuading the board to raise my salary from $80K to $100K, as if that would make a huge difference to me.
Here was that beautiful $100K pay stub:
I felt very “good” about this income, but it didn’t do much going from $80K to $100K since the government kept so much in taxes. It also made me see that I was an employee in a flat business. The potential upside of my equity (how you get rich) was very little because I missed our shot in 2012.
I quickly realized I needed to think about how to shut Heyo down, or sell it, so I could move from making money as an employee to making money as an investor. I went from fighting like hell to get the board to increase my salary to wanting out.
I was obsessed with Jim Collins’s mantra: Good is the enemy of great. And I wanted big-time “great.” I knew I had to get out of Heyo and free up my time so I could do the deals I’m doing now, which are making me millions. It was the right move.
This is a big thing to remember: if you’re young and single and have no responsibilities, even if you’re a student in a dorm room, now is the time to take big risks because if you fall, you won’t fall far. You don’t have a lot to lose. I missed out on a ton of cash when I didn’t sell in 2012, but my losses would have been even bigger if I’d stuck with Heyo any longer. I was under twenty-five years old with no obligations to anyone. It was the perfect time to make bigger bets.
WEIGHING OFFERS: WHEN TO SELL, WHEN TO WALK
I know not everyone reading this is a dorm-dwelling, risk-taking twenty-something. It can be hard to know when you should stick to what you’re doing (as Zuck did in 2006) or cash in while you can (what I should have done in 2012). Add big responsibilities to the picture, like a family that’s counting on you, and the choice can be paralyzing.
But the decision comes down to simple math. If you’re in a moneymaking business, think about the time value of money. Let’s say you own 50 percent of a company that makes $500K a year and you’re paying yourself an $80K salary. And let’s say there’s no money left over at the end of the year, so you’re not paying yourself a dividend.
If you could sell the company today for 1x its annual revenue (that’s $500K), that’s going to put $250K in your pocket pretax (you own 50 percent). My general advice is that if selling will get money in your pocket now that would otherwise take you three years or more to earn by working in the company, take the deal. Then use the cash to start something new.
So if you’re making $80K a year, pretax, with no dividends, take the deal that will put $250K in your hands now. You’ll then have that momentum behind you. You can say you sold your company and you’ll have $250K you can reinvest in your next idea.
Walking away from a moneymaking business is scary, but you have to trust yourself in these moments. You’re smart. You will have another great idea. Bet on yourself. Use the momentum to create something else.
We always worry there will never be a better idea, but that’s never true. You don’t have to look past Elon Musk to see that. His first business was an agency that he launched in his twenties. He sold the agency and started X.com, which eventually morphed into PayPal. After he got out of PayPal he used his profits to launch SpaceX, then Tesla, and most recently The Boring Company. At the time of this writing Musk’s net worth is $20B. Even if you never go that big, Musk is a great example of what can happen if you trust your gut and keep building on current successes.
So take the win. Momentum is a huge asset. Keep it, hold it, and create it. Sell your company if you get the chance and the cash makes sense. A lot of it comes down to emotions, too. When you look at your final offers, if you don’t think there’s one that’s competitive, email everyone and say, “Sorry, I can’t take the offer. I’m going to keep building the company.” Many times when you really walk away like that, people will reply with a higher offer.
When you use this tactic, and it works, remember your buddy Nathan!