Is it Time to Sell?
Thomas L. Churchwell, Managing Partner, ARCH Development Partners
Most entrepreneurs eventually face the question: “Is it time to sell my company?”
More often than not, the issue arrives at a less than optimal time and frequently with inadequate time to consider all of the issues. As with most things in life, the best practice is to assume the question will arise and to game out possible scenarios.
The question of whether or when to sell can arise in a number of contexts and frequently in the midst of other strategic situations:
- A growth opportunity requires more capital than is available; should capital be raised (e.g., sell part of the business) or a buyer/merger partner sought?
- An unsolicited offer comes across the transom.
- The founder wants to retire, remove more cash than the business can support, or allocate assets into more baskets.
- Cash flow cannot support continued operation.
To a certain extent, all but the last of these can be addressed before the business gets started. Like angel investors, venture capitalists, and other illiquid investors entrepreneurs should plan for their exits before they get into the deal. So before you launch spend some time with your advisers, family, lawyer, and accountant pondering the following:
- Why am I really doing this?
- Get rich.
- Launch my dream product.
- Improve the world.
- Build a business for my kids.
- Replace the job I just lost.
- What does success look like?
- Revenue is X dollars per year.
- The product is a household name.
- Break-even has been reached and everyone gets paid.
- What do I want my obituary to say with respect to the business?
- He got rich quick and spent many years in tropical spas.
- She left the world a better place.
- She was a serial entrepreneur who founded many successful businesses.
- He built a pretty good business, but lost his family, health, and friends in the process.
Realistic answers to the above can be guides to answering the question: “Is it time to sell my business?”
If your goal is rapid growth or obscene wealth, you’re probably going to need more capital than you can raise from friends, family, and fools. Typically you’ll need angel or venture capital.
While frequently not recognized, the decision to raise venture capital determines the answers to many of the above questions and, in fact, is a decision to sell the company sooner rather than later. Since venture capitalists (VC) and most angel investors only get paid at exit, they are understandably eager to get to that point and in most cases ensure this outcome by taking voting control of the business.
If you’re out to improve the world or buy yourself a job, keep away from VCs and look to friendlier sources of capital, which are often angels. Most VCs and angels are investing for a profitable early return (e.g., company sale). Some investors (e.g., family members) will be satisfied with a business that pays dividends, psychic or monetary. Also, plan to grow at a rate that those sources of capital will support, especially if you intend to operate the company into your senior years or leave the company to your heirs.
- Recruit a board of directors or set of advisers very early.
- Don't ever run out of cash. Plan your cash needs and raise more before you need it.
- Realize that angel investors and venture capitalists are investors and expect to exit the company in a fixed period of years (usually about five). Bringing in equity investors begins to define your exit strategy or at least the timing of your exit.
- When plans change or an unexpected offer comes across the transom, rely heavily on your advisers to seek the best path to follow. Raising capital and/or selling the company are defining moments.
- Revisit your exit strategy frequently - at least every year.
Most entrepreneurs don’t plan to run out of money or energy. It is, however, possible to recognize some potential pitfalls and make short term plans to face the inevitable. Seek out people who can give good counsel about where you and the business are headed. Often the same people who helped you plan the business startup are a good resource.
Regular meetings with a board of directors, advisers, or consultants are vital and can help you see trends that you may not otherwise see until it’s too late. If your advisers sound the warning, hire an investment banker or other expert to guide you through the process.
Even with exemplary planning people and circumstances change, and you may find yourself with a growth opportunity or an offer to buy too tempting to ignore. Get professional advice from people you trust and whose fiduciary duty is only to you. You may not get another opportunity.
© 2006 Thomas L. Churchwell. All rights reserved.