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The Decision to Sell

“Questions confine answers. When there are no longer questions, answers are no longer bound by them.”
– Lao Tzu, Chinese Philosopher

If you’ve already decided to sell your business, you can skip this chapter. If you’re still on the fence, read on.

The decision to sell your company is challenging. You’ve invested years or decades painstakingly building your business, and you’ve made countless sacrifices along the way. It’s an emotional decision that should not be taken lightly.

And when considering such an important decision, there are four important factors to take into account:

Your goals, including personal, financial, and business
Internal factors, such as emotions
External factors, including timing and competition
Your business’s value and exit options

You can’t decide whether to sell your business by going through a simple checklist. Instead, the determination should be made deliberately, taking all factors into consideration and balancing emotion and intuition with facts and logic.

While this framework is useful, the four factors mentioned aren’t all-encompassing. Rather, these considerations are meant to be jumping-off points to further explore when contemplating the sale of your business. Every entrepreneur’s situation is different, and many will need to consider additional factors not addressed here. Regardless, start by considering these four factors and see where your journey takes you.

1: Your Goals

“You are that which you are seeking.”
– Saint Francis of Assisi, Italian Friar

Start the process by clarifying your goals – understanding what you want is the first step towards getting it. Only once you understand your long-term goals, therefore, can you examine how selling your business will move you closer to them.

Many factors must be considered when deciding to sell your business, and considering all of the elements at once can be overwhelming. Starting with your goals simplifies the decision-making process. The risk in selling your business before examining your goals, is making a decision that doesn’t align with them. As a result, you may find yourself backing out of the sale or later living with regret.

Would selling your business help achieve your long-term goals?

To gain a better focus on your goals, ask yourself these questions:

What are my long-term goals?
Would selling my business help me achieve my long-term goals?
What am I trying to accomplish?
How does the sale of my business help me achieve my goals?

Align your long-term objectives with the sale of your company. If your business is preventing you from achieving your goals, you should sell it. If selling your business is critical to achieving your goals, spend additional time planning your exit to ensure the sale helps accomplish these goals.

Is your goal to sell your company to become financially independent? If so, get your business valued and develop a plan for increasing that value. Then track your results to ensure you meet your objectives. Prepare a personal financial and tax plan to make certain your exit will meet your financial goals.

Is your goal to sell your business so you can start another business or switch industries? If so, consider your lost opportunity cost and the cost of remaining in the business.

What are you losing now by not pursuing your next business or opportunity in another industry, or a different goal or dream? Ideas are infinite, but time is finite. You have a limited number of ideas you can pursue in your lifetime.

Again, the decision to sell your business should always begin with a thorough and careful review of your long-term goals. If your goals are unclear, then the decision to sell your business will be based on a rocky foundation. It will be harder for you to commit to the sale without a definite goal, and this uncertainty will minimize the overall value you extract from the transaction.

Do you need to sell your business to achieve your financial goals?

If you must sell your business to achieve your financial goals, consult with a financial planner to ensure you can meet your financial objectives upon a sale and meet with a CPA to consider the tax implications of the sale.

For most owners, the sale of their business achieves a personal long-term objective. They depend on the sale to help them accomplish their financial goals. But it’s important to separate your financial goals from your non-financial goals to establish a clear outline of what you want.

It’s not always necessary to start your planning process with numbers – after all, money is always a means to an end and not an end to itself. Remember as business author David Baughier once said, “Once you have enough money, it’s not about the money.” Instead, ask yourself what stands behind the numbers. First, clarify your long-term goals, and then assign numbers to the goal, if possible.

Ask yourself these key questions to clarify your financial and non-financial goals:

What are my financial goals?
How do these fit into my long-term plans?
What is more important – my financial goals or other goals I may have set?
What am I going to do with the money?
Is my goal to take money off the table and diversify my risk?

What other goals can you achieve if you sell your business?

“The price of anything is the amount of life you exchange for it.”
– Henry David Thoreau, American Author and Philosopher

When making the decision to sell your business, consider the lost opportunity cost. Pursuing opportunities is a mutually exclusive decision if you believe in focus. Chasing after more than one objective at a time dilutes your focus and lowers your chance of overall success. There is a significant lost opportunity cost to holding onto a business where you have lost your passion, especially if its value erodes. What other opportunities are you passionate about that you could be pursuing?

If remaining in your business is costing you $500,000 per year due to the value you place on lost opportunities, holding onto your business for an additional three years will cost you $1,500,000. If your company is worth $5 million, it may make more sense to sell your business now for $4 million and experience a $1 million short-term loss rather than lose $500,000 per year in lost opportunities.

While the decision to sell your business can’t always be reduced to numbers, it can be helpful to look at a sale from multiple angles, including both quantitative and qualitative perspectives.

In addition to lost opportunity costs, you need to consider the current state of your industry. Not all industries are created equal and careful consideration must be given as to when to jump from one ship to another.

Many entrepreneurs make the mistake of thinking that the grass is always greener on the other side and that other industries offer more potential than the one they are currently in. If you believe your industry is in decline, consider consulting with other entrepreneurs who have experience in multiple industries, or ask the opinion of a professional who deals in multiple industries. An M&A advisor, for example, likely has experience in various industries and may have perspectives that you lack.

If your other goals are primarily non-financial in nature, your decision can be especially difficult, and you must carefully weigh your options.

What is owning your business precluding you from doing? What is that experience worth to you?

Only you can decide. Life is short, but you should take your time when making this important decision.

2: Internal Factors

“Everything considered, work is less boring than amusing oneself.”
– Charles Baudelaire, French Poet

Here are more questions you should consider:

Am I happy? Am I really happy?
Is my business making me unhappy?
Would selling my business make me happier?

Entrepreneurship is a struggle. No entrepreneur is happy 100% of the time. Look at yourself and your business objectively and determine if a change might make you happier. At the same time, though, beware of trading one set of problems for another.

Would selling your business make you happier?

If you are facing challenges in your company, ask yourself if the root of the problem is a lack of management skills or if the obstacles are caused by external factors beyond your control, such as increased competition in your industry. If your issues are the result of a lack of management skills, trading one business for another is not guaranteed to solve your problems.

On the other hand, some industries are not known for creating happy entrepreneurs. These include businesses that may have less-than-ideal customers, such as liquor stores, payday loan shops, and collection agencies. Stressors can also include long hours in restaurants, home health care, and retail, demanding clients in professional services, or low margins in personal services. If the general environment of your industry is an unhappy one and you value your well-being, consider making a change.

Would you keep your business if it made you happier? Would you keep your business if you could revamp your schedule and spend 80% of your time on high-value activities you enjoy and less time on minor details?

If so, then restructure your business to focus on what you love to do and take advantage of your strengths. If you have lost passion for your industry and have a strong gut feeling you need to make a change, it’s time to develop a definite plan to exit your business.

Would selling your business cure your burnout or boredom?

Look in the mirror and ask yourself these questions:

Am I burned out?
Have I taken a vacation recently?
What other options have I considered or attempted to cure my burnout?

Burnout is normal in all endeavors, and all entrepreneurs should make time for regular relaxation to de-stress. Professional athletes periodize their training. CEOs take regular time off to recharge. You should do the same to both prevent and treat burnout.

Fatigue is normal if you aren’t taking time off. Just because you are burned out doesn’t necessarily mean you should sell your business. First, determine the cause of your burnout and evaluate if selling your business will be a cure or if other measures are more appropriate for rekindling your passion.

If your burnout is due to problems with your employees, then it’s time to either upgrade your management skills or upgrade your team itself. Trading your business for one in another industry will not help if people-management issues are at the root of your burnout.

If you haven’t taken a vacation in a long time, other methods are available for relieving burnout. Ideas could include stress-management techniques or restructuring your business to minimize activities you aren’t good at or that cause you stress. First, set out to relieve your burnout. If you find you still lack passion for your industry, are bored, and in need of a change, and if you’ve attempted to address your burnout and boredom one too many times without effect, then perhaps it’s time for a change.

How will you spend your time after you sell your business?

The question to ask yourself is not, “What will I do with my money when I sell my business?” The real question is, “What will I do with my time when I sell my business?”

The matter of what to do with the rest of your life is a difficult topic for entrepreneurs to face. Most business owners are so busy that they don’t have time to confront the deeper issues. They are so occupied playing whack-a-mole in their business that they don’t have the energy to face life’s existential questions.

After selling your business, it might be the first time in decades you’ve had the freedom to decide how you spend your time. Will you fritter away your days buying toys, or do you plan to pursue something more meaningful? How you spend your time should be based on your values. Your values are the foundation on which you make decisions. Having a clear and documented set of values makes the process of deciding how to allocate your time easier.

After all, as author Michael LeBoeuf once said, “Waste your money and you’re only out of money, but waste your time and you’ve lost part of your life.”

Selling your business will leave you with time. If you don’t have another passion, you will be left with a void, lacking your business to fill that empty time. If this void isn’t filled, your being may lack meaning. Sitting around the pool sipping margaritas on a giant, inflatable pink flamingo can become unfulfilling, especially for driven entrepreneurs. Of course, some may never tire of this. Examine your own values and goals so that you don’t build yourself a void after a successful sale. Don’t avoid the real question by drowning yourself in material pleasures.

Are you committed to the process of selling your business?

Are you truly committed to the process of selling your business, or have you made this decision on a whim?

Move forward with your plans only if you are fully committed. But be aware that doubts will remain no matter how committed you are. Be deliberate in making your decision, so you can deal with doubts as they arise. Talk with trusted friends who have successfully sold their businesses. Journal. Read. Explore your decision from all angles.

Remember that, as management consultant Peter Druker once said, “Unless commitment is made, there are only promises and hopes but no plans.”

Selling a business is a process, not an event. The process of preparing a business for sale and successfully exiting takes several years for many entrepreneurs. Shortcutting the procedure can leave money on the table and turn into a big waste of time if you begin the sale only to change your mind later. Only you can answer if you thoughtfully and purposefully made this decision or if an impulse is driving you. If you are still on the fence, take more time to explore the decision fully before making a final determination.

3: External Factors

“We’ve done better by avoiding dragons than by slaying them.”
– Warren Buffett, American Investor

Once you have considered your internal factors, it is time to take a broader look at the external factors that will affect your decision. Industry conditions and competition will play a large part in how smooth, and ultimately successful, the sale process is for you.

Is the timing right to sell your business?

Timing the sale of a business is difficult, but it can be done. The ideal time to sell is when your business and industry are about to peak. Consult with veterans in your industry to obtain their opinion regarding the current market cycle. Consider both industry cycles and macroeconomic cycles. But remember that, as with most important decisions, the timing will never be perfect.

Align the timing of your goals with the timing of the sale of your business, industry trends, and market activity, if possible. Otherwise, avoid selling in a severe economic or industry downturn. Your revenue should be stable and preferably growing by the rate of inflation or more when you put your business on the market. If it’s not, have an expert analyze your business to determine if it makes sense to stabilize your company’s revenue before putting it up for sale.

How should competition in your industry affect your decision?

You can bet that the “Oracle of Omaha,” Warren Buffett, has asked himself these questions more than once regarding specific investments:

Is the competition becoming stronger in my industry?
Are new venture-backed entrants threatening my market share?
Do I have enough capital to fight a competitive industry war?
Are indirect competitors threatening to permanently change the structure of my industry (e.g., Uber vs. the taxi industry, Airbnb vs. the hotel industry, online news vs. traditional news)?

If competition is increasing and becoming more fierce by the day, but you lack the passion and capital to compete, exit as quickly as possible if you can. The value of your business will decline proportionally to a decline in your revenue and cash flow. Face the inevitable conclusion and sell while you have something to sell. Unfortunately, I see too many entrepreneurs hang on for too long, only to have nothing valuable left to sell.

Don’t make this common mistake.

4: Value and Options

“Don’t be afraid to give up the good to go for the great.”
– John D. Rockefeller, American Business Magnate

Knowing what questions to ask yourself is half the battle, like these:

Have I had my business appraised recently?
Am I aware of current multiples in my industry?
Have multiples remained steady within my industry, or have there been significant variations over time?
Do I know what changes I need to make to unleash the value of my business?
Do I know what my business would be worth if I made these changes?

Consider these questions, and many more, as you begin to explore your exit options.

What is your business worth?

Your business is likely one of your most valuable assets and may comprise the majority of your net worth. Intelligent financial planning is difficult without having an accurate idea of the value of your most valuable asset – your business.

It makes sense to pay a professional to value your business and have an idea of the steps you can take to increase its value. It’s best if you and your business are prepared at all times for the unexpected buyer, and that you regularly take steps to increase the value. The buyers most likely to pay the highest price are those who approach you directly, unsolicited. So be ready for them.

Consider diversifying your risk if your net worth is highly concentrated in your business. There are many options for diversifying your risks, such as a recapitalization or an outright sale. An appraisal of your business is the most prudent place to start and can help you make this decision.

Knowing what your business is worth also enables you to determine a bottom-line price if a competitor approaches you. Without such planning, you may be caught off guard and end up selling your business for far less than what it’s worth.

What are some exit options?

Ask yourself these questions that go to the heart of the choices you will face:

What are my options for exiting my business?
Should I consider selling or gifting my business to family members?
Is my management team, or someone on the inside, a potential fit?
Is a sale to a competitor most practical?
Is a private equity group likely to buy my business?

Most entrepreneurs lack the experience to determine exit options most suitable for their business and industry – options that will unlock the most value. That’s why you should consider having a third party perform an unbiased assessment of your business.

This assessment should lay out your exit options and steps to prepare your business for sale. The risks and opportunities vary depending on who you sell your business to. Different steps will need to be taken depending on whether you plan to sell your business to an insider, a competitor, or a financial buyer. You should carefully consider these issues before deciding which exit option to pursue.

There are also creative alternatives to a conventional sale. Again, before proceeding, establish your goals. With clearly defined goals, a professional can easily and efficiently lay out the most practical exit options for your business based on your goals, along with tips for reducing the risk associated with each option. In the words of Warren Buffett, the Oracle of Omaha: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

Is the value of your business increasing or decreasing?

Sell while you are able to extract any remaining value. If the value of your business is decreasing and you lack the drive to turn it around, you should consider the lost opportunity cost of holding onto your business. If revenue continues to decline, so will the value of your business. Selling a business with consistently declining revenue is difficult, but it can be done. Selling a business with stable or increasing revenue is far easier.

Take an honest look and ask if you can turn your business around. If you are burned out and competition is increasing, it’s time to get out. If the decrease in the value of your business is due to a one-time event or an internal factor and you have time to cure the problem, then do so.

Is your business ready to be sold?

These are not always easy questions to answer, which is all the more reason to ask yourself:

How salable is my business right now?
Are there deal-killers present in my business that need to be fixed? If so, how long will it take to fix them?
Is it worth the time and energy to attempt to straighten out these issues, or is it best to sell my business in its current state?
What is my personal ROI if I fix these issues before selling my business?
What is my lost opportunity cost in attempting to cure these potential deal-killers?
Could my time be better used elsewhere?

Ideally, you should invest several years preparing your business for sale to maximize its value. The more salable your business, the more your business will be worth. There are two ways to improve salability: eliminate deal-killers and optimize your business’s value drivers.

Start by fixing any deal-killers. These could include inaccurate financial statements or undocumented intellectual property. Once these issues are addressed, calculate the ROI on the remaining potential changes and start with the highest ROI tweaks – see my “Return on Value Drivers (RVD) Model” in Chapter One to help you decide which value drivers to focus on first.

Not every business owner has the time and energy to fully prepare their business for sale. In these cases, changes can continue to be made while the business is on the market. If your business is not fully prepared, you may still be able to sell it but expect to receive less than full value.

Key Points

“See things in the present, even if they are in the future.”
– Larry Ellison, American Inventor

Choosing whether to sell your business will be one of the most important decisions of your life. Use the framework outlined here for making this determination:

Goals: Start by considering your objectives and lost opportunity costs. This is the foundation of your decision.
Internal Factors: Address the emotional or internal factors of a sale – namely, those relating to happiness. This step takes time to do correctly, so don’t rush it.
External Factors: Once you have thoroughly explored your emotional objectives, consider the external factors, such as the timing of selling your business and the state of your industry.
Value and Options: Finally, you can commit to the process after considering your goals and both the internal and external factors. Only then should you explore the additional facts related to the decision – such as timing, value, exit options, and salability.

By following this framework, you can make sound decisions on your company’s future with the assurance that you have taken the most important factors into consideration.

Learn More

The idea of being happy in business is one which doesn’t get talked about much, but I had an entire conversation about exactly this topic in my M&A Talk podcast episode titled Happiness: How it Relates to M&A and Entrepreneurs with Marco Robert. You can join us for this unusual conversation by going to the Resources section of our website at morganandwestfield.com.