He runs a very successful importing company with forty people across the U.S. He has fat profit margins, hedges his currency risk and has actually been able to grow through this recession. In short, he’s one of the lucky ones.
As our conversation unfolded, he revealed that, even though he’s more than a decade away from “retirement age”, he has decided to sell his business.
He started our conversation by giving me the strategic reasons for getting out now: he’s in a growing, consolidating industry and they’re coming off their best year etc. but I could sense there was a deeper rationale for why he wanted out. Finally, he came clean:
“I guess I just want to take some chips off the table.”
As soon as he uttered those words I was reminded of one of the strongest reasons I wanted to sell my last business: the desire to stop gambling.
The bigger the business, the more risky it feels
They say starting a business is risky but I don’t see it that way. When you have nothing to lose, you’re not risking much. Sure, smaller businesses have a higher failure rate than larger ones, but I think they are actually less personally risky for the owner. If the start up you’ve sunk $50,000 in fails, you’re out $50,000. Not fun, but also not a death knell.
As my last business grew, I started to get the sense I was gambling more than I would like. It was a subtle feeling that started innocently enough but grew as time went on. I had most of my financial eggs in one basket and every day I went to work, I was gambling it.
The more successful our business became, the more nightmare scenarios I imagined:
- What if xyz company starts competing with us?
- What if xyz person leaves us?
- What if we have a fire?
- What if our network gets hacked?
These thoughts kept going through my mind – usually in the middle of the night — to a point where eventually it was worth selling to stop the little voices in my head.
The risk that feels heavy to you, is light to somone else
And there is someone out there who is happy to take on your risk. A business ten times your size might happily absorb the threats that feel heavy to you as a small price to pay for a chance to grow. For them, gambling on your little business might be fun money.
If you want to make the voices stop, consider these four strategies:
Option 1: Milk the cash cow
One tactic is to put the breaks on your growth and squirrel away enough cash outside of your business that your company becomes a smaller proportion of your overall nest egg. Usually this means shunning growth opportunities in favour of maximizing your profits, but if you do it right, you can reduce the feeling that your gambling and hang on to your entire business. Just make sure you keep your cash in a separate account outside of your company so that it is safe from creditors and law suits.
Option 2: Limit your risk on a vendor take back
The only thing worse than gambling on yourself is letting someone else gamble your money. When you sell a small business with less than a million or two in revenue, you typically have to finance part of the sale so you’re taking a risk that the buyer knows what they’re doing.
Take a hypothetical case of a business that sells for one million dollars. The buyer might scrounge up $600,000 and ask you to finance $400,000. You get an interest rate better than you would at the bank but you also get your business back – albeit in much worse shape than when you left it – if the buyer defaults on your loan. The best way to limit the proportion of cash you lend the buyer is to get multiple offers for your business (use a broker to drum up the bids). Also do whatever you can to ensure a monkey could run your business (systems, tools, templates, manuals etc.). That way, even if the buyer is an idiot, they can’t screw your business up too badly before you get your money out.
Option 3: Take a second bite of the apple
Recently, some private equity companies have condescended to come “down market” and are considering businesses with “as little as” one million dollars in EBITDA. They used to consider $3 million in EBITDA the floor but they’re becoming desperate to invest the cash they raised in 2007 before they have to give it back. Taking money from a private equity company can allow you to pull some chips off the table while remaining in the game.
For example, you might sell 50% of your business to a private equity company for four times EBITDA and continue to hold 50% with the hopes of getting a better multiple on the second half of your shares. You get to pay off your house, and buy a boat (or ski chalet or whatever) and – at least in theory – get to sell your second tranche of equity at a premium multiple (maybe six, seven or more depending on the industry, your growth potential etc.) because the private equity folks have helped you scale up. You sleep better and stay in the game. I say “in theory” because working for a private equity company is not for the faint of heart. More on that later.
Option 4: Sell
Of course, the very best way to stop gambling is to get liquid and sell. It’s not a fool proof solution because you’ll still have to leave some of your money in the business in the form of an earn out. You’ll also have to leave about 10% in an escrow account for a year just in case the buyer discovers something they think you lied about during diligence. But if stopping the voices is your number one priority then selling free and clear is probably your best option.
Flickr photo courtesy of JulieFaith