Sell vs hold onto your business – The downside of holding on

Business Value Builder Crowe Horwath Ireland

The downside of holding on to your business and just ‘milking it’

If you have considered selling your business of late, you may have been disappointed to see the offers a business like yours would garner from would-be acquirers.

According to the latest analysis of some 20,000 business owners, the average offer being made by acquirers is just 3.7 times your pre-tax profit – significantly less than those reserved for public company stocks.

Given that paltry offer multiple, you may be tempted to hold on to your business and “milk it” for decades to come. After all, you might reason that if you hang onto your business for four or five more years, you could withdraw the same amount in dividends as you would garner from a sale and still own 100% of the business.

This logic seems sound on the surface, but there are some significant risks to consider.

1. You shoulder the risk
The biggest downside of holding on to your business, rather than selling it, is that you retain all of the risk. Most entrepreneurs have an optimism bias, but you need only remember how life felt in 2009 to be reminded that economic cycles go in both directions. While business may feel good today, the next five years could well be bumpy for a lot of founders.

2. Disk drive space
If you think of your brain like a computer’s disk drive, owning a business is like constantly running anti-virus software. Yes, in theory you can do other things like play golf and still own your business, but as long as you are the owner, your business will always occupy a large portion of your brain’s capacity. This means family fun, holidays and weekends are always tainted with the background hum of your brain’s operating system churning through data.

3. Capital calls
Let’s say your business generates €200,000 in Earnings Before Interest Taxes, Depreciation and Amortisation (EBITDA), and you could sell your company for four times EBITDA or keep it. You may argue it’s better to keep it, pull your profit out in the form of dividends, and capture the same cash in four years as you would by selling it. This theory breaks down in capital-intensive businesses where there is usually a big difference between EBITDA and cash in the bank. If you have to buy machines, finance your customers, or stock, a lot of your cash will be locked up in feeding your business and the amount of cash you can pull out of your business each year is a fraction of your EBITDA.

4. Tax Treatment
The sale proceeds of your business may be more favourably treated than income you would garner by paying yourself handsomely with the Just Milk It Strategy. Tax on income can be over 50% where tax on business disposal can be as low as nil.

5. You Can Do Better
Finally, you may be able to attract an offer higher than three or four times your pre-tax profit. This is where we come in. We have worked with many companies who are focused on growing that value – building a worthwhile fund – to enable successful retirement. This is a combination of building that profit and building that multiple. Some of the owners we work with do even better, stretching multiples into double digits.

So how do you know if it is the right time to sell?

One answer to this age-old question is that the time to sell is when someone else is willing to invest more in your business than you are.

When you start a business, nobody is willing to invest in its success more than you. You’ve already worked a 40-hour week by Wednesday and, if you’re like most founders, you’ve invested a large part of your liquid assets to get your business going. You’re in deep.

In the early days, you are willing to risk your business on a new strategy because the business is pretty much worthless. But as your business grows and becomes more valuable, you may find yourself becoming more conservative, unwilling to risk the equity you have created inside your business on your next big idea. You may have reached a point where it is time to sell it to someone else who may be willing to risk more time and money for your business than you are.

The point where a buyer is willing to risk more than you happens at a different stage for everyone. Let’s say you have a business worth €1 million today. Would you be willing to risk the entire thing on a new strategy for a shot at making it a €10 million company? Many entrepreneurs would take that bet.

Now imagine you have a company worth €10 million and your business represents the bulk of your net worth. Most would argue €10 million is life-changing money. Would you be willing to risk your entire company for a chance to make it a €100 million company? The marginal utility of an extra €90 million is minimal — we only need so many cars — but the risk is significant. Fewer owners would bet €10 million for a chance at €100 million, yet a buyer might.

When someone else is willing to invest more in your business than you are, it is probably time your company finds a new owner.

If you are interested in learning about the value in your business and the optimum time to sell, contact our Business Value Builder team