To Sell Your Business or Not To Sell Your Business — That is the Question (a series)

Should you sell your business? This is one of the most difficult questions and there is no one right answer. I have been asked this question so many times and it is the most difficult to answer. To provide some assistance on the question, however, I will be putting together a series of posts on the factors that I find myself discussing with friends as they attempt to decide whether to sell their business or not.

In general, I have a bias against selling a strong business. There just are not that many strong businesses in the world, and you are one of the lucky ones to be able to own one. People spend a lifetime trying to create a strong business or find one to buy and both of those paths are difficult. And, businesses tend to be the best place to invest capital for the long-term because of their ability to grow, to be interesting endeavors, to be engaged in making the world better, and their ability to adapt to changing circumstance of the government or the economy or other external factors. Of course, sometimes there are reasons that one must sell a business and I understand that. Absent those reasons, however, full disclosure is that I have a bias against selling a strong business.

Below are some of the factors that I recommend you consider when trying to decide if or when to sell your business. One factor may outweigh everything else. Each of these will be a separate, expanded post in the coming weeks.

1) Strength of the moat of your business (May 14, 2012) — how reliable are the profits? The more reliable the profits will be in the future, it is obvious that your business is worth more. And, I would argue, it will grow in value if the profits are increasing and this provides an argument against selling the business.

2) Business Growth (June 12, 2012) — is your company and its value growing or not? More growth is an argument to not sell the business. On the other hand, growth is very helpful (and probably necessary) to sell a business.  But, maybe the pace of growth is slowing and that is a factor.

3) The Status of Your Management Team (June 28, 2012) — is your management team in place and ready for the sale or transition?  My recommendation is to have your management team in place because it greatly increases your universe of potential buyers.

4)  Is Your Accounting Accurate and Ready for Scrutiny? (July 23, 2012) — are your books ready for an objective party to look at your operating earnings beyond an audit and are you missing any important accounting concepts?  It may be worth it to hire an expert to perform a “Quality of Earnings” review prior to beginning the sale process.

5) Personal factors. These can be numerous and have great variety. And, these reasons may outweigh any of the other factors. Maybe you aren’t interested in the business any longer. Maybe you aren’t able to own the business any longer. Maybe you need the cash from selling the business for estate planning, family or other reasons. These are the most difficult factors for an outsider to provide input, but this post will attempt to assist you in identifying whether there are ways other than selling to manage the personal factors.

6) External factors. Sometimes, external factors as varied as competition, regulatory or tax changes, new technology or other things suggest to sell or not to sell. These factors can sometimes be closely related to the strength of the moat around your business.

7) What does the business (meaning, your customers and your employees) need? The business may need something different than what you are able to provide. Maybe the best owner for the business (meaning the collective group of customers, suppliers, and employees) may not be you and it’s best to find a home for the business for it to reach its potential.

8) Value and Price. As a buyer, value is what you get (future profits) and price is what you pay. As a seller, price is what you get and value is what you are giving up (future profits). This trade-off is in the eye of the beholder. Some of the other factors listed here affect the likelihood of future profits (the strength of your moat and growth in particular), but you will ultimately have to decide if this trade-off is worth it to you.

9) Effort to Sell. Selling a business is not easy. It can be all consuming of your time, your emotion, and your ability to stay on top of the business while still managing a selling process. Yet, it is very important to do this well and dedicate the time, energy, and emotional space necessary. If you cannot, I may recommend that you wait until a time when you can. It is that important.

10)  Effort to Buy — Transaction Costs for Buyer.  Richard Ruback of the Harvard Business School has researched the market for the buying and selling of smaller firms.  He writes that smaller firms often receive lower prices because the transaction costs (due diligence, legal, potentially finding new management) for the buyer are too high as a percentage of the sale price.  Due diligence can be expensive if your accounting is not done properly and professionally; legal can be expensive if you are not experienced in selling a business (educate yourself ahead of time on how common terms for a sale so that you don’t try the patience of the buyer; and forcing the buyer to find a new management team can limit your universe of buyers.  If you can reduce the transaction costs for the buyer, you will increase your purchase price and reduce the time required to sell your business.

I will explore each of these factors in other posts.