[Editor’s note: With valuations of private companies at high levels, driven by a robust M&A environment, now is the time for some people to think about selling their business. Here’s a primer.]
Should I sell my business? A question every business owner ponders, but how do you know the right answer?
Three major factors are typically involved in the decision to sell: market, financial and personal. By carefully evaluating each of these areas, you’ll find your answer.
Step One: Review the Market
The market for your company’s products or services should be the primary consideration for timing the sale of your shares. In some markets, like technology, it may be difficult to predict when the market will take off or hit saturation • use your best judgment. A number of independent indicators may signal when it is time to sell: accelerating sales, sudden and sustainable increases in the sales pipeline, new competition entering the market, and easier close rates on large customer sales.
- At what stage of market development is your company? You may decide to hold onto your shares if your company is early stage and there is confidence in near-future growth.
- Are you positioned as the market leader? A market leader may be more inclined to hold onto shares unless there is an offer on the table you just can’t refuse. If you are not well positioned to be one of the top two players, an early exit may be more compelling.
- Has Microsoft or IBM entered your market • and how defensible is your position? If the big guys are entering the market, is their entry relevant to you? The stronger position you own, the more security you have in maintaining market lead.
Step Two: Understand the Financials
Compare of the economics of a share sale today with a share sale in three to five years. If your business is in the rapid growth phase, and you see no other benefit in selling shares, this analysis will likely lead you to retaining shares. After all, your business may be growing so rapidly that it would be difficult to achieve full compensation today for your perception of its future value.
- What is the expected revenue growth over the next three to five years based on the market review?
- What is the future exit value for your shares after considering dilution from any anticipated financings?
- What is the discounted value back to today’s dollars?
- Use a low discount rate if you are not confident, a higher one to equalize for increased risk factors. For a technology venture, a discount rate of 20 to 30 percent is usually appropriate to adjust for comparable risk.
- What are the factors that could prevent your company from realizing its growth objectives on the timetable outlined? For example, is management team experienced in leading a company through these growth cycles and running a large company?
Step Three: Consider the Personal Aspects
Never overlook your personal lifestyle considerations. A founder-entrepreneur late in their career with relatively few assets will approach liquidity with a different risk profile than someone early in their career.
- Risk Profile • Is the equity in your company your primary asset? Does it represent a majority of your holdings? What is your risk tolerance?
- Real Money • Is real money a financial goal worth securing at the expense of other potentially lucrative opportunities? Does your risk tolerance to achieve additional financial goals drop significantly behind this goal? Will selling all or some of your shares enable you to attain a level of financial security and achieve a more ambitious goal for the balance of your holdings?
- Personal Growth •What are your aspirations? Realizing a vision? Playing a key role in the success of your business? Or is it relinquishing control to a more suitable candidate who can see your business to its full potential?
- Changing Roles • Can you work with your existing boards and key executives or are roles and responsibilities changing? During the transition from founder-led business you may decide to take on a leadership role and allow key executives to manage the business. What changes do you foresee now and in the future?
Score each category with a plus or a minus. Alignment across all three indicates a sale is prudent • sell, sell, sell! If the factors are not in agreement (for example, the market says sell and for personal reasons you are resisting), focus on the tradeoffs, set a timetable for when you believe alignment will occur, and look for a mixed solution • such as a partial sale. By evaluating the market, financial and personal aspects of your business, you are on your way to making a sound business decision.