I was an entrepreneur by accident. When I started blogging in 1994, I didn’t expect to earn money; I wasn’t even trying. But almost ten years after building my first website, I created Consumerism Commentary to learn about personal finance and to improve my own money situation. Within about a year, much to my initial surprise, the website began earning money. Discovering a potential for growth, I started thinking about growing a business.
The word entrepreneur had always had a negative connotation for me. Right or wrong, hearing the word made me think of sleazy salespeople hustling for cash and taking advantage of proverbial suckers, a community of which supposedly grows at a pace of 1,440 per day.
If you’ve found yourself an owner, either through starting a business yourself, acquiring control a company as an investment, or inheriting a family business, you should consider your exit strategy from the beginning.
A business that is at least moderately successful, or one that has a potential to be, can have a value that can be expressed in dollars. There are a lot of ways to discover that value, but all the mathematic formulae don’t matter; it comes down to whatever one winning buyer would be willing to pay.
There are many reasons a business owner might choose to sell the company he or she worked hard to build and grow. By considering some of these factors, I was able to better determine the most opportune time to sell my business.
1. Taking your business to the next level requires a level of commitment you’re not ready or willing to make. If you’ve reached the goals you’ve set for yourself and your business so far, and you feel you need to expand the personnel, work harder, or make additional investment to reach a higher set of goals, you have to consider whether the changes you need to make are congruent with other priorities in your life. There’s nothing wrong with deciding you’re done all that you’re willing to do, particularly if you have something else to turn to – perhaps a new business or some other important piece of your life.
Maybe it’s just time to retire and enjoy some of the financial benefits that come from selling your business.
2. The volatility of maintaining revenue is beyond your control or the risk of loss is high. You may consider moving on from your business if there are random forces at play. Many companies that relied on their website’s appearance as a top result for a popular search term started realizing there was some risk associated with relying on revenue from one source when Google began making major adjustments to the search engine’s algorithms.
Companies that were “following the rules” lost website visitors, and that translated into lost revenue. There’s an element of these changes that is beyond the control of the business owner who doesn’t have significant resources. If you are not interested in participating in this particular search result chase and another company is, let them take on the risk while you cash out.
3. You see market trends are not favorable. If the industry your business is in changes quickly, such as technology, you have to be ready to reach to market trends very quickly or face the risk of becoming irrelevant. For example, the trend in personal computing is moving away from desktop computers towards smaller, more portable devices, beyond notebook computers.
If you don’t have the skills to adapt to a mobile environment, don’t want to make the investment in resources that will help move your business to mobile, or just aren’t interested in taking the company in that direction, the time may be right to move on.
4. Other investments might offer better growth opportunities. Owning a business might be the result of a passion for the type of activity that business is involved in, but it’s still an investment. It’s an investment of money, time, and effort for the owner. It’s an investment of willingness to accept risk. If you are at a point in your life where you want your assets in more stable investments or if you don’t expect the type of growth in your industry that justifies the risk, you should be considering alternative uses for your assets, including the value of your business.
A broad stock-market index fund is expected to return 8 percent over the long-term according to financial advisors. Most businesses that grow will grow at a faster pace, but if you don’t expect your business to do so, you could be better off using the value of the business to invest elsewhere.
5. The competitive environment is not favorable. Being on the cusp of a new industry is exciting – for the first few years. If you’re an innovator as a small business, it won’t take long for the real money to show up. If your activities prove to be worth public interest and outside investment, two situations could occur.
The first scenario is that investors want to help you grow while getting their own piece of the action through investment returns. The second scenario is that outside investors and other business owners successfully replicate what you have done, and with comparable resources, become a competitor.
6. The regulatory environment is not favorable. Industry and government regulations are a fact of operating a business. If you don’t want to answer to a set of rules, don’t become a business owner. Sometimes regulations can appear to be unpredictable – though they never are for someone who pays close attention to discussions in their industry.
For example, there is no reason that credit card issuers should be surprised when new regulations role out or when the government creates new regulatory agencies like the Consumer Financial Protection Bureau. Over the course of the history of business in the United States, sometimes the government creates rules that help businesses, while sometimes the rules are in favor of consumers. You have to expect and be able to react to change.
Businesses whose models don’t take the changing nature of regulations into account distribute press releases and appear in the media complaining about external forces; effective business owners prepare and adapt.
7. You need the capital. Sometimes the reasons for selling a business have no connection to the business itself. Not all business owners are millionaires, not all pay themselves a good salary. Particularly when a business is just getting off the ground, it may make sense for the business to reinvest as much as the profit as possible, and that could mean the owner refuses a salary. The owner’s share of the company, whose value is expected to rise from a value of zero at the beginning, might be enough compensation.
There may come a point in the business owner’s life when he or she needs money. Perhaps it’s just a question of retiring and wishing to be able to do so without any financial barriers. Or perhaps there’s a more pressing need for cash, although selling a business is usually not a quick process.
8. You get an offer you can’t refuse. Motivated buyers are great for sellers. If you find yourself facing an unsolicited offer to acquire your business and the prospective buyer is offering a price well beyond what you believe the value to be, first ask whether they are recognizing a potential for growth you’re missing. Receiving an offer above your expectations may motivate you to redouble your efforts to grow the business on your own or to revisit your method for placing a value on your business.
From the buyer’s point of view, the price they’re offering has to be a bargain. Perhaps the prospective acquirer has resources to invest in the business you might not have on your own. If you still believe the offer is a great deal, take it.
Have you ever sold a business? What were your considerations when deciding to sell?
Photo: Flickr/SCA Svenska Cellulosa Aktiebolaget
Updated October 29, 2013 and originally published September 10, 2013.