Crossroads: Deciding to Sell Your Business vs. Doubling Down

Executive Summary

Should I sell my business, or should I double down? As a successful entrepreneur, you have learned to temper your optimism with realism. But what should prevail now — your optimism or realism?

You’re concerned that if you don’t double down, your competition will put you out of business — for good — and you will have nothing left to sell. On the other hand, if you double down, a large payout glimmers in the distance. But if you sell now, you may be leaving money on the table.

You’re faced with a decision that will determine the fate of … the rest of your life. These critical life decisions are often made as a reactionary response and in a frame of mind that is sometimes fleeting. Make your decision deliberately. But remember, truth is a pathless land — there is no right, and there is no wrong.

So what should you do?

The answer depends on you and the state of your industry. You must look both inward — to yourself — and outward — to your industry — for the answer.

In the article that follows, we show you how to look both ways.

Look Outward – On the State of Your Industry

If you are in a highly competitive industry, you must invest cash back into your business to remain competitive. Instead of taking money out of the business, you must put money back into the business — perhaps the exact opposite of what you want to do at this stage in your life.

You may be at a time in your life when you prefer to diversify your wealth instead of concentrating it. You may feel it is risky if too much of your net worth is concentrated in one illiquid source — your business. If a competitor puts you out of business — you could lose the majority of your net worth.

As a result, you face a critical decision. You must double down or sell — now. If you don’t double down, your competitors will trample over you, and the game will be over. But perhaps you’ve concocted an elaborate contingency plan involving opening a burger joint. Do you sell now and get out while you can, or double down and risk spending your life flipping burgers?

So, how do you decide? Settle in, clear your plate, take that last bite of your burger — and let’s walk you through a method for making this decision that will hopefully get you out of this conundrum.

Objectively Evaluate Your Business

Knowledge is collecting information – wisdom is simplifying information. First, collect information, and then step back to simplify the information you have collected.

Step 1: Collect Information

Gather the following information and facts on your business, the industry, and the competition:

• Your Business
  • Are your revenues stable, declining, or increasing?
  • Are your gross margins stable, declining, or increasing?
  • Are your net profits stable, declining, or increasing?
  • Is your value proposition still competitive?
  • Are you gaining or losing competition?
• The Industry
  • Is your industry fragmented and run by small, independent businesses? Or is it slowly consolidating?
  • Is your industry growing, or is it in decline?
• The Competition
  • Are your competitors stealing your market share? Is your market share slowly eroding?
  • How strong are your competitors?
  • Are there any new competitors backed by institutional money, such as venture capital?
  • Have any competitors introduced a new value proposition that has the potential to change the industry and make your business obsolete?
  • Will you continue to remain competitive if you only innovate incrementally, or are dramatic changes needed to remain competitive?

Withhold your judgment while you are collecting information. Stick to solely gathering information — think objectively without the need to weigh the facts or assess their impact. Once you have gathered this information, the next step is to analyze and synthesize it.

Step 2: Simplify Information

Once you have gathered this information, use the power of wisdom to simplify it. Be honest with yourself in assessing the state of your industry — don’t let your heart fool your intellect. Reduce your information to the three following areas:

• Your Business: Is your business growing and staying competitive, or are you in a slow decline?
  • If your business is in decline, ask yourself why. Is it due to your inability (lack of skills) or unwillingness (lack of motivation), or is your competition simply stronger than you? If you lack the skills or motivation to compete, and your competition is strong, then it’s time to sell.
  • If your business is strong and your value proposition is still relevant, then it’s not necessary to sell.
• The Industry: Is your industry growing or in decline? Are competitors slowly consolidating?
  • If your industry is in decline, then it’s time to sell unless you have the ability and motivation to reinvent your value proposition.
• The Competition: Is competition strong and likely to soon put you out of business?
  • If your competition is strong and getting stronger by the day, and you lack the skills or motivation to compete, then it’s time to sell.

“Simple ideas lie within the reach only of complex minds.”

– Remy de Gourmont

Look Inward – On Yourself

Once you have examined your business and industry, it is now time to look inward — to yourself. While analyzing your business and industry involves your intellect, looking at yourself involves the heart.

“We do not see things as they are, we see them as we are.”

– Anaïs Nin

You must give careful thought to each of the following three areas.

Step 1: Assess Your Skills

Do you have the skills to compete? If not, are you sufficiently motivated to acquire these skills? Is your competition so strong that you won’t be able to acquire the skills fast enough to compete? This last situation is most common in innovative industries that require a high degree of technical knowledge, such as software.

In cases in which you lack the skills to compete, and you are having trouble keeping up with the competition, you have two choices:

• Double down — carve out a niche for yourself in the industry or raise money to enable yourself to compete.
• Exit the race — sell your business.

Step 2: Assess Your Motivation

Do you have the energy and motivation to commit to your business? If your industry is highly competitive and competitors are slowly eating away at your market share, then you will need an unusually high degree of motivation to remain competitive. On the other hand, if competition is weak, you will likely be able to get by with an average amount of energy and motivation.

Are you burned out? If so, why? Are you burned out because you haven’t had a break in 10 years, or are you burned out because you hate your industry? Dead fish swim with the stream. If you’re burned out, and competition in your industry is getting stronger by the day, then you must realistically assess your ability to compete — and swim against the stream.

“Life shrinks or expands in proportion to one’s courage.”

– Anaïs Nin

Step 3: Consider Your Dreams

Do you love your business? Do you really love your business? Knowing what you know now, would you get into your business again? What are your dreams for five years, 10 years, or 20 years from now? Are you ready, emotionally and financially, to retire?

“You don’t find yourself — you create yourself. No one is better qualified to be you — so be you.”

– Unknown

The answers to these questions first requires that you know yourself. What makes you happy? What makes you excited? What does your ideal day look like? Does your business align with your dreams? Or is your heart elsewhere? If your heart is elsewhere, perhaps it’s time to exit gracefully. If you aren’t sure, then your objective is simple — get to know yourself.

Many entrepreneurs are so busy that they have little time to truly get to know themselves. To do so requires a significant amount of time and exploration. Journal. Read autobiographies. Talk to other business owners. Travel. Traveling is one of the best methods for learning more about yourself — we travel not to see the world but to find ourselves. Travel helps us see what is possible. As Simone Weil said, “Attachment is the great fabricator of illusions; reality can be obtained only by someone who is detached.” Travel is a powerful tonic for detaching us from our illusions and allows us to gain perspective so we can more clearly see the reality before us.

The better you know yourself, the easier your decision will be. If you feel you don’t know yourself enough to be confident in your decision, then take a break and get to know yourself before making one of the most critical decisions of your life.

“I’d rather regret something I’ve done than something I wish I had done.”

– Lucille Ball

Signs You Should Double Down

These are signs you should double down:

• Your Business, Industry & Competition
  • Your Business: You have carefully gathered sufficient information and facts on your industry, and you realistically assess that you can continue to remain competitive. Your business is continuing to grow, and your competitive advantages will continue to remain attractive even with only incremental innovation.
  • Industry: Your industry is growing, and prospects for your business and industry are bright. Your industry is not quickly consolidating — small independent operators will continue to be successful in the long run.
  • Competition: Competition in your industry is not strong. It’s unlikely your competitors will put you out of business anytime in the near future. There have not been any new entrants backed by institutional funding (e.g., venture capital) or wildly attractive value propositions that have been introduced in your industry recently.
• Financial
  • Net Worth: Your net worth is not concentrated in your business — your retirement is not dependent on the sale of your business.
  • Reinvestment: You can afford to reinvest cash back into your business if this is required to remain competitive.
• You
  • Reason for Sale: If you sell, you have no compelling way to spend your time. You have no true reason to sell.
  • Skills: You have the skills and ability to remain competitive.
  • Motivation: You love your business — you have the drive, motivation, and energy to continue.
  • Dreams: You love your business, and it aligns with your dreams.

Signs You Should Sell

These are signs you should consider selling:

• Your Business, Industry & Competition
  • Your Business: Your revenue is declining, and your value proposition is slowly eroding. Incremental innovation will not be sufficient to survive. If you don’t double down, your business will likely fail.
  • Industry:
    • Your industry is in decline.
    • There is an acquisition frenzy in your industry — large competitors are quickly gobbling up smaller competitors in order to become the dominant players. Acquisitions in your industry can bring both good news and bad news — good news if you want to sell because valuations may become higher — and bad news because competition will become stronger. In an aggressive marketplace, buyers will come out of the woodwork and become aggressive acquirers to protect their turf. This can be an ideal time to sell. In many industries, there is a limited window of opportunity — critical mass must be established as quickly as possible in a “winner takes all” market. If your business is in such a market, and you lack the capital, skills, or motivation to compete, then it’s time to sell.
  • Competition: Competition is strong. If you don’t compete, you will be out of business soon. Several new venture-backed competitors have entered the market with enticing value propositions. Good ideas are often being pursued by dozens of competitors simultaneously, frequently without them having knowledge of one another — carefully scan your industry to see if any such competitors are quickly gaining market share. If so, sell before a competitor dominates the market, and your business or product becomes obsolete. Smaller, agile competitors can also quickly out-innovate you. Be on the constant lookout for competition that can unseat you.
• Financial
  • Net Worth: Your net worth is concentrated in your business — your retirement is dependent on the sale of your business. You are uncomfortable with how much of your wealth is tied up in your business.
  • Reinvestment: You can’t afford to reinvest cash back into your business, and doing so is required for you to remain competitive.
• You
  • Reason for Sale: You have other hobbies, passions, or businesses to pursue. Your business is not your life, and your life is not your business.
  • Skills: You lack the skills and ability to remain competitive.
  • Motivation: You are burned out — you don’t have the drive, motivation, or energy to compete.
  • Dreams: You hate your business, and it doesn’t align with your dreams.

On Being Flexible

If you decide to double down and recommit to your business, carefully watch your industry for any signs that you need to change your game plan. You must remain flexible and be prepared to adapt to changes in your industry and overall market conditions. You may also have to adjust your timeframe based on market cycles instead of establishing a definitive timeframe. For example, if you decide to sell once your business hits $10 million in revenue, you should be prepared to sell at any time if an acquisition frenzy starts in your industry and multiples quickly rise.

The sale process can take from three to 12 months and may sometimes take much longer. In most cases, you will need to assist with the transition for one to two years. If this is the case in your industry, then it may be necessary to begin the exit process several years before you want to exit from your business fully.

You should also be prepared to change your game plan if you obtain new information about your industry or discover new truths about yourself. Time trieth truth — truths may be slowly revealed to you at the most unexpected of times.

Exploring Alternatives to a Sale

There are two primary alternatives to an outright sale — a recapitalization and raising money.

Recapitalization

A recapitalization, or recap for short, is simply a partial sale of your company, generally to a private equity (PE) group or corporate venture fund. For example, you may sell 20%, 40%, or 60% of your company. The sale can be either a majority or minority interest. In most cases, you must remain on to operate the company.

A recap allows you to take money off the table now while still keeping some chips on the table. In other words, you lock in some gains, which allows you to diversify your financial position while keeping the possibility open for a second exit in the future. It is essentially a double exit — you sell 30% of your company today, then sell the remaining 70% of your company in a few years to another buyer, such as a publicly traded company or a strategic industry buyer.

Private equity groups and corporate venture firms make these investments only in promising companies in which significant opportunity exists. Their objective is to make an investment in a portion of your company today and then sell this portion at a significant gain in three to seven years, if they are a PE firm, or integrate your business into theirs, in the case of corporate venture firms.

The advantage to you is that you can sell now and take some chips off the table, work for the larger company for a few years, and then either retire or start your next venture. An additional benefit is that the buyer will have deeper capabilities and resources that you can benefit from, such as wider distribution channels or the brand name of a larger company.

A recap is ideal if you:

• Have a business with a strong competitive advantage and need the expertise or capital funding of a third party to capitalize on an opportunity in your industry.
• Are willing to stay with the company for one to three years, or longer, after the closing.
• Want to diversify your wealth and take some chips off the table now.

Raising Money

Raising money can come either in the form of debt (banks) or equity (angel and venture capital investors). This section will focus on selling equity as opposed to debt. In most cases, this money will be raised by venture capitalists (VC). This is only suitable for high-growth opportunities that offer the possibility of a 10 to 100 percent return for the investor.

The mechanics of the investment look similar to a recap — you sell a portion of your company, in the form of equity, to an outside investor. But, the objectives and characteristics of companies that are suitable for this arrangement are quite different than they are for a recap.

Raising money from a VC is a grueling process that can take up to one year, and you may have to give up control of your company along the way. VCs only invest in ultra high-growth opportunities that have the potential of developing into nine-figure businesses ($100 million and more). Less than 3% of those seeking venture capital obtain an investment, and the majority of VC-backed investments fail.

In summary, raising VC money is a risky, high-stakes game reserved for scalable businesses that can produce outsized returns. On the other hand, a recap is best for stable businesses with predictable growth and cash flow. Think of it this way — recaps are for more stable, lower-growth, lower-risk businesses, whereas venture capital is for risky, high-growth businesses.

Summary

The Ultimate Question – Do You Sell or Double Down?

Every entrepreneur will face this critical junction in their lives — do you sell or double down? The outcome of this decision will impact your entire life. Entrepreneurship is a stressful, high-stakes game, but the rewards are worth it. Look both inward — to yourself — and outward — to your industry. Once you thoroughly explore yourself and objectively collect the information you need on your industry, you will often find that the decision has been made itself.

“Nothing in this life is to be feared. It is only to be understood.”

– Marie Curie