ADMITTING THAT IT’S TIME TO sell the business can be difficult for any entrepreneur. Every chapter of this book has outlined the gut-level longing that drives us to start an entrepreneurial venture and the many difficulties and obstacles we have to overcome to transform our compelling idea into a successful, thriving organization. So why would we want to sell it?
Be prepared to hear that question a lot when you make the decision to sell your “baby.” When I first told my friends and relatives that I’d sold my business, many of them immediately assumed that something went wrong, forcing me to sell. Very few people congratulated me, even though that would have been the most appropriate reaction. I haven’t funded research into the psychological reasons behind these glum—and, typically, quite incorrect—assumptions, but I suspect that they’re related to the Risk Box.
Those who draw negative conclusions from “I sold my business” view entrepreneurship as a job, a source of income, and security. To them, selling the business equates with losing your job—a destabilizing, demoralizing freefall into uncertainty that upturns the tidy world contained within the Risk Box. That’s not the way it is at all. Instead, selling the business is the entrepreneur’s ultimate reward for years of hard effort.
So to answer the question I asked at the top of this page, there are a host of reasons why you might decide to sell your business. And, it’s true, some of them are negative; think financial strains, divorce, death, differences between partners, lost contracts and agreements, family disputes, and disasters such as fire or flooding, just to name a few. These are the events most of those sad and sympathetic people imagine have driven you to the ultimate sacrifice of putting your business on the market.
The positive reasons for selling, however, are much more likely to drive your decisions. First among these is your commitment to ongoing change, which extends beyond your business practices to your own challenges as an entrepreneur and a leader. On the other hand, you might simply be ready for a lifestyle change, or you may want to use the sale to merge your business and ensure its future growth. Maybe the sale will bring you the capital you need to start a new business, or maybe it’s just the most rational way to realize the profits you’ve been working for since you opened your doors.
For many entrepreneurs, the desire to sell their business coincides with their decision to retire. As I mentioned earlier in this book, retirement isn’t a good motivator for a strong sale. Entrepreneurs who sell their business in order to retire are in a vulnerable position and, as I’ll explain later in this chapter, run the risk of not fully realizing the full value of their business. As I said, there are a lot of reasons for selling your business, and it’s important that you understand your reasons and how they fit into your current situation and your original exit strategy. I’ll end this chapter by telling you about my own process of deliberation, as I came to understand that it was time for me to enter into my last phase as owner of the company I founded.
But let’s begin by examining the 10 most common reasons for choosing to sell a business, drawn from the experiences of investment banker Bob Contaldo, of the mergers and acquisition firm Corporate Finance Associates.1 Contaldo has worked closely with a number of clients over the years, helping them make decisions about selling their organizations. Taking the time to consider these ideas from all angles can help inform your decision as you weigh the pros and cons of kicking your own exit plan into action.
No matter how well your business is progressing, at some point it may no longer fuel the passions you originally felt for it. That’s okay; in fact, it’s only natural. As your years with the company mount, you can develop frustrations with customers, credit, employees, regulations, and a hundred other factors. I certainly experienced that “thrill is gone” moment a few times at TRC. Struggling with shrinking margins and customers obligated by state regulation to buy on price rather than value became an increasingly disheartening prospect.
Your exasperation might be just a passing moment that a short vacation can alleviate, rather than requiring that you put your company on the market. But most entrepreneurs are accustomed to periods of exasperation or exhaustion with their business, and few would be driven to sell when they simply need to regroup and re-energize in order to tackle the issues they’re facing. When no amount of rest or revitalization can shake the notion that you simply no longer enjoy running your business, you have to take a much more serious look at your emotional state and what it means for your continued participation in the organization.
If you come to the conclusion that you do need to sell the business, make sure that your emotions aren’t leading your decisions or actions. Selling on emotion is dangerous—and it can be extremely costly. If you can’t assess your situation with emotional balance, you run the risk of selling your company for less than its true market value. You should avoid acting on emotion in any facet of business, but you need to be particularly certain that you don’t allow emotion to play a role in your decision to sell or the negotiations that follow.
Professor John M. Richardson, of the School of International Service at American University, Washington, DC, has been quoted as saying, “When it comes to the future, there are three kinds of people: those who let it happen, those who make it happen, and those who wonder what happened.” Professor Richardson is talking about change in that quote, and, as we learned in chapter 11, successful entrepreneurs embrace and seek out change. Given all of that change, however, eventually your business and its environment may bear little resemblance to the organization you founded. Even though you drove many of those changes, the constant demands of leading or responding to significant change may wear you down over the years.
Changing markets can also take their toll on entrepreneurs. Those changes might include competitors, regulations, customer qualifications, labor requirements, patents, technological advancements, and supply constraints. You’ll easily glide through some market changes, but others may require large investment in capital or regulatory compliance. Such changes can exceed your company’s credit limitations, and they can be especially disruptive to complacent businesses that have not foreseen them coming. Failure to adapt to market changes can be costly as well. If you respond or react too slowly, you may eventually be forced to close your doors before you’ve had an opportunity to find a market in which to sell your company.
Entrepreneurs who are on their game are able to look to the horizon and adapt accordingly. Only complacent entrepreneurs allow their business to exist solely in the present, rather than planning for tomorrow. You can’t sustain your business that way. If your marketplace has changed dramatically, and you find that you simply are no longer willing to embrace those changes, that’s a strong sign that you’re ready to move on.
Throughout this book, we’ve seen that risk is almost synonymous with the term entrepreneurism. However, time and routine can entrench even the most ardent entrepreneur and discourage risk taking. If that happens to you, your performance as an entrepreneur and a leader can begin to slide.
The elements of your Risk Box are constant and can hold you back from getting to the next level. Most entrepreneurs are financed by personal guarantees on bank loans and lines of credit. If that’s been the case with your entrepreneurial venture, taking the company to the next level may not be realistic using traditional financing vehicles, and you may not have the stomach or knowledge to obtain more elaborate methods of funding. If, as an entrepreneur, you are unwilling to work with these new methods to grow your business, or if you’ve simply run out of gas in juggling the cash flow against obligations, then it may be time to get out of the driver’s seat.
This reason for selling can be very compelling, if you’re a workaholic entrepreneur who invests all of your effort and abilities into your business at the expense of family time. Let me remind you, however, that business ownership and marriage are not mutually exclusive relationships. Businesses don’t require physical and emotional nurturing, but family most certainly does. Temporary neglect may be acceptable to your family, but it can’t be a long-term situation. If you don’t know how to make the shift away from “all business, all the time,” selling may be your best option. (Remember, though, that few successful exit strategies involve waiting until your family is ready to kick you out to begin the sales process.)
If this feels like your most important reason for selling, you should consider all of your options. There are plenty of paid services, experts, coaches, and friends who could help you balance your commitments, and I advise you to explore those alternatives before opting to sell your business.
Bob Contaldo considers an unprecedented seller’s market as being a logical consideration for an entrepreneur contemplating a sale, but I worry that this reason is really just a bit of self-promotion for business brokers. I’m wary of the idea that we’re ever in an unprecedented seller’s or buyer’s market. I suppose there are cycles when low interest rates, tax considerations, foreign interest, or other factors trigger unusual spikes in merger and acquisition activity. Conversely, M&A activity virtually ceased as credit markets went into a deep hibernation during the economic slump of 2008–2009. Anyone hoping to sell during this time undoubtedly found fewer buyers, and I’m certain that more deals fell apart and forced the postponement of many sales.
For the average entrepreneur, however, the time to sell a business is unlikely to be influenced by the “perfect storm” market scenarios business brokers like to conjure up. Again, if this reason is playing a strong role in your considerations, take an especially long and careful look at the market place and its historic evidence before you make the call.
On the surface, it sounds like every business owner’s dream: a buyer with deep pockets of cash who is just aching to acquire your company. That cash deal is attractive. About 80 percent or more of all businesses sold are financed in some fashion, and financing a sale increases the cost, lengthens the time to close, and poses the risk that the deal might falter due to complications with the financiers. The buyer might even be willing to pay more than your company is worth, simply because the deal (and the worth of your business) won’t be subject to the scrutiny of those financing the purchase. Well, as Contaldo said in his article that outlines these 10 reasons, “We can dream, can’t we?”
Actually, this buyer scenario happens probably less than 1 percent of the time for small-to-medium businesses, even though it’s the scenario brokers paint most vibrantly and the one that tugs most often at the emotional heart-strings of entrepreneurs. Let me assure you, though, that if you don’t plan or have a vision for this type of exit strategy, you have virtually no chance of making it happen. If this is the way you want to end your connection with your business, be sure that you craft this exit strategy during the Idea phase of your entrepreneurial experience and work toward it every day thereafter. That’s your best hope for hitting a bull’s-eye with this long shot of a deal.
Scaling for growth is one of your obligations as an entrepreneur, and in some cases, you may be too good at it. Fast growth is exciting and rewarding, but it comes at a price and has unique demands. As the business grows, you may not know how to boost it to the next level, or you may be unwilling to let it go there. If, as mentioned in the third item in this list, you’re stymied as to how to properly manage risk and debt, you may be holding back your business. When that happens, the business can buckle under the strain of its own blocked momentum.
We’ve seen businesses that rise up fast and evaporate just as quickly when growth and cash flow can’t be managed simultaneously. The discount retail fashion clothing chain Steve & Barry’s, founded in 1985 by University of Pennsylvania classmates Steven Shore and Barry Prevor, grew at an envious pace between 2006 and 2008.2 Its strategy during those years was to consume premium mall space at lease rates far below market because it would serve as a desirable retail anchor attracting smaller tenants. Sales skyrocketed as the company aggressively scaled growth by opening store after store. However, Steve & Barry’s business and profits could not keep up with the company’s real estate obligations. When those bargain-rate long-term lease agreements expired and were renewed at current market rates, mall owners were less eager to extend the same terms, and Steve & Barry’s sales were not enough to keep its financial statements in the black. In 2008 the company liquidated, shuttering 276 stores dotted throughout 39 states.3
Even if cash flow is not the concern, experienced management may be. Entrepreneurs who recognize when to turn over the reins to a seasoned management staff that can run the business at this high-growth stage are truly visionary. Fast growth can take an entrepreneur by surprise and leave him wondering how to respond to keep the trajectory straight without having the wheels come off, so to speak. This is a critical point to recognize the value of a board, mentors, or even self-assessment as to whether you want to stay on in this role. Perhaps it’s time to hire a president to manage the daily operations while you separate as chairman of the board to concentrate on vision.
Whoops, too late. You don’t want to be in a position of wanting (or having) to sell when your business has gone flat or is in decline. Just like taking a new car off the lot, the value of your business is going to be worth far less when you go to market with flat or declining revenues or earnings.
Unfortunately, many entrepreneurs do sell at this point. Often this occurs after the peak of their career, when they have less fire in their belly to continue with change and innovation. For many of the reasons we’ve discussed in this chapter, you may find yourself starting to let things slide, relax on oversight, or become complacent as a leader. You can expect the growth of your organization to stall as a result. Business also may get flat due to the particular industry, the geographic area, or other outside factors, but your business plan and exit strategy have to be prepared to deal with those contingencies. If you have—and follow—a well-constructed exit plan, you won’t let things get to this point before deciding to sell. If you don’t have that plan, you may get into a jam, and then be stuck trying to unload damaged goods.
In researching this book, I conducted a survey among my colleagues and associates as to what title resonated best with them. Interestingly, novices frequently suggested that I take Exit out of the title. They stated that some would-be entrepreneurs never want to exit their business, and that would turn them off from buying the book. Well, guess what? Entrepreneurs have no choice as to whether they will exit their business at some point. In fact, the ultimate reason for exiting is death, and I haven’t found one entrepreneur able to prevent that change from occurring. So, if you’ve reached the stage where flat or failing profits are the reason that you’re selling the business, you’ve waited too long to make a good decision—and the decision is inevitable.
This reason is very similar to the first one we talked about—the thrill is gone from running your business. In fact, employees may be exactly why you’ve lost your entrepreneurial passion for the business. Most entrepreneurs of small- to medium-size businesses cite employee issues as one of their greatest headaches. Some of this pain may be self-inflicted; you need to maintain adequate managerial levels between you and your workforce if you want to be able to focus on the bigger issues of growing the enterprise. Remember, such boundaries enable you to work on the business, rather than in it—a necessity for visionary leadership.
Employee issues may be more elaborate if unions are involved or if your workforce requires things like work visas. But even handling employee-related costs such as medical insurance, profit sharing, taxes, and retirement plans is rarely draining enough to wear out a committed entrepreneur. The day-to-day management of people, however, can consume too much time, keeping you from your true interests and responsibilities as an entrepreneurial leader: innovating, scaling, and leading your company. If you’ve allowed yourself to remain too heavily involved in managing your human resources, you may have exhausted your enthusiasm for the business. At that point, selling may be the best option, for you and your company.
Personal reasons for selling a business can encompass a whole array of concerns. If you find yourself in this position, you can only hope that the sale is a positive lifestyle transition. As I mentioned earlier, there may be a whole host of negative reasons as well that compel you, as an entrepreneur, to sell and “get out.” If this is your major reason for selling, be sure to plan carefully for your next step so you are moving toward something new rather than running away from the past. Many successful entrepreneurs develop a compelling need to give back after they sell. They find themselves with both the time and the money to focus on more philanthropic concerns, and that’s where they want to be and how they want to round out their legacy. Again, the best outcome from a sale prompted by this reason involves a positive move forward for you, your family, and your future as an entrepreneurial thinker and agent of change.
LET’S MAKE A DEAL!
Even if you don’t have a compelling reason to sell your business, others may be happy to explain to you why it’s in your best interest to do just that. Let me walk you through my experience with these pesky predators—I mean salespeople.
It’s a mild June morning. I’ve just arrived at the Radisson Hotel in Rosemont, Illinois, the hotel and convention center mecca that surrounds Chicago’s O’Hare International. I find my meeting room with the typical continental breakfast setup and mingle with a variety of fellow participants. The audience is made up, for the most part, of white men, young and old, dressed in a wide range of formal and informal attire. Our hosts are easy to spot: three well-dressed men who look like high-priced lawyers or Wall Street barons. The trio includes a senior-executive type in his late 50s, a similarly distinguished-looking gentleman in his 40s, and a young 20-something apprentice. I was there in response to their advertisement’s pitch to come and learn the strange and mysterious world of mergers and acquisitions—for only $50!
If you own a business, you will receive flyers from “salesmen” like these. And, if you ever give in to the urge to attend one of their “conferences,” you’ll hear the same story I heard on that lovely day in June. It goes like this:
“If you’ve ever considered selling your business, the timing is perfect—it’s now! Even if you don’t want to sell, you owe it to yourself to have this valuable information. Foreign companies are lining up to buy American companies—your American company—in all sectors, in all shapes and sizes, regardless of profitability. They want you, and they will pay top dollar! Because of the dollar’s value, now is the best time for these foreign companies to invest in you. Act fast because this perfect storm in the M&A market will not last!”
I came to this gathering to learn about the process behind all of those glossy direct-mail flyers that I had been receiving. What I got was a 30-minute intro that outlined a fast and simple sale for my business that would take place very soon—if I wrote the buyers a check for $20,000 to get the ball rolling. I quickly realized that these guys were sharks, some of the slickest, most well-scripted bait-and-switch artists I have ever come across. After hearing their opening spiel, I politely walked from the conference room and out to my car, shaking the last “salesman” off of my leg before closing the door. I learned one great lesson that day, and I’ll pass it along to you here: avoid these “sell your business” hucksters like the plague. That one piece of advice will save you, at minimum, a wasted morning and a $50 registration fee—or it might keep you from writing that $20,000 check.
As I’ve said, it’s rare for entrepreneurs to have an early-stage exit plan, but it’s also rare for the sale of a small-to-medium-size business to go as successfully as did mine. Let me tell you how my decision to sell unfolded, to help you understand the importance of aligning your earliest entrepreneurial goals and subsequent leadership decisions with your final exit plans. As you’ll see from my experience, although it will still take some soul searching and deep deliberation, your best decision about the best time to sell your business will be driven by the exit strategy you envision and work toward from the beginning of your entrepreneurial journey.
It was 2005, and TRC had been in business about ten years. With the many successful innovations we’d implemented, I could clearly see that the company was capable of $100 million in sales, and I figured it would take us seven years to get there. Now, the only question was how. The bootstrap model was working fine, but it seemed unrealistic that cash flow alone would be able to propel 20 percent year-over-year growth for seven consecutive years. That kind of growth would require that TRC expand its facility and credit vehicles. The additional staff we’d need to accomplish this goal would bring some additional strain and require upgrading some of our personnel systems. In fact, everything from our IT infrastructure to our lead-generation system would have to be upgraded in order to move TRC into this heightened growth mode.
It was clear to me that my old bootstrap business model wouldn’t support this kind of growth. I needed capital, and that would require a bank loan, private equity, or a wealthy investor. An IPO wasn’t the answer, because TRC simply wasn’t going to be an attractive public company. My Risk Box alarm was going off; I was afraid that my desire to grow would overextend the company’s resources—including all of us who worked there. So what did I want to do?
As I imagined my industry five years into the future, I saw a dramatically altered marketplace for enterprise software sales. I saw an approaching era of creative destruction in the reseller channel, bringing dramatic changes that would require significant capital to accommodate. As for TRC’s innovations, I knew they would be outdated and replaced within this time, and that I would have to build some sort of service offering into my business model in order to maintain our competitive edge. Certainly I could continue to innovate, but did I want to? How would I differentiate my services from everyone else? How could I scale a services model nationally? The even bigger question was whether I wanted to even be in that business—and the answer was no. Services sparked little passion in me. TRC had grown to an impressive $30 million in sales, became one of the most respected resellers in the nation, and was at its peak. Now we were stuck.
I still had one other option for growing TRC to $100 million—an outright sale of the company. Perhaps I could sell the company to a firm that shared my vision of where TRC could grow and who had the capital and resources to make it happen. After all, that was the plan. When I first started the business, I intended to eventually sell it; I had even created a benchmark goal to sell at this very time frame. I knew the time was right. TRC was at the top of its game, showing consistent year-over-year revenue growth and a realistic capability to grow to our targeted levels.
I briefly considered merging with another large educational reseller, Journey Education Marketing (JEM), which was a comparable competitor of TRC. JEM had been in business longer than TRC and carved out an enviable position selling software to students and faculty, giving its model a consumer focus, rather than the business-to-business model at TRC. Merging our companies had significant benefits for JEM and TRC and would likely put our combined revenues very close to the $100 million mark. But, after an informal conversation with JEM’s founder and president, I discovered that, although he had been entertaining similar thoughts, he wasn’t ready to take action on them. I also realized that I wasn’t completely comfortable with the idea of giving up control of my organization while retaining some shared responsibilities for its success.
Uncertain about how to best move forward, I stopped to reflect on three personal goals I set for myself many years earlier:
The first of these goals now struck me as being relatively common among entrepreneurs-in-waiting, but the others deserved more attention.
Why would I attach a time frame to sell before the company ever opened its doors? The answer is unique to the business I started and its industry. I was planning to be a technology reseller, and the one constant I could rely on in that business was that technology would always be rapidly changing—and that it would be changing my business as well. I had seen the trajectory of other tech companies during my career, and I knew that in 10 years, either my business would be established and ready to achieve its mission, or market advancements would have eclipsed our growth. In either scenario, we would be in a position to sell the company at that time. While I didn’t view 10 years as an absolute deadline for that sale, I considered it a significant milestone for reviewing my progress.
Why had I determined to sell to a Fortune 500 company? My vision wasn’t about building a company that sold software to schools, but about owning a niche market that a Fortune 500 would want to tap into. The education market represents over 15 million students, and it refreshes every year. Factoring in the community college market, the demographic expands dramatically. If I met my business goals, TRC would attract a Fortune 500 company’s interest.
If I was going to take on the risk and investment of starting my own business, I wanted it to count and count big. I envisioned a business that would build in value and be able to achieve a sales multiple that would provide a significant payout. This may seem contrary to everything I’ve said about following your heart rather than your pocketbook when starting a business, but there is no fault in creating a business you are passionate about and devising a way to make a lot of money from it as well. My entrepreneurial idea and the passion to bring it to life formulated my mission statement. The goal to sell to a Fortune 500 was a natural result of that mission.
After careful consideration, and in keeping with my original exit strategy, I decided to sell TRC outright. I was concerned about the industry outlook and investment needed to reach our seven-year target, and I was incredibly optimistic that this was the best time to realize my final goals for TRC. Now was an opportunity to maximize shareholder value. It felt right, and I had learned to listen to my gut. If TRC were to grow to $100 million, it would do so by putting the heavy lifting and risk on the acquirer.
I was achieving the goal that I had pitched to just about everyone we hired at TRC. In almost every interview I conducted, I laid out my goal to sell TRC to a Fortune 500 company. I did this purposely, to let potential employees know what I intended to do with the company. Not everyone can thrive in a company that they know is going to be sold, and I didn’t want to encourage anyone to join our business without knowing, up-front, that this outcome would be in the future. In my eyes, the goal served to be motivational and a testament of our ambitions. I wanted to make that rhetoric a reality and, in doing so, live up to the promise of expanded career growth.
Yes, I realize that my situation and experience as an entrepreneur is unique—yours will be, too. But as you enter the Exit phase of your entrepreneurial venture, it’s important that you have some firm and reliable milestones to help guide you through its complexities. Incubating an entrepreneurial idea takes incredible talent. Launching an entrepreneurial startup is an extremely difficult process. Running a business and scaling it into a successful, thriving enterprise takes monumental effort. You can’t afford to let your attention and energies flag when you reach the end of your time with your business. You’ll have multiple influences driving your decision to exit your business; it’s up to you to make sure that you remain on course with the exit strategy you developed and followed throughout your entrepreneurial journey in order to arrive at the best possible conclusion for you and your business.
Making the decision to sell is just the kickoff of your exit strategy. Once that decision is made, you have to prepare yourself and your company for the selling process. That preparation is essential if you don’t want the uncertainty of an upcoming transfer of ownership or leadership to interrupt your business processes and interfere with its profitability or perceived market value. In the next chapter of this book, we’ll talk about just what’s involved in putting your business up for sale while continuing to drive its success.