Anatomy of an Exit: Selling Your Company

By March 19, 2009blog

For as long as I can remember, I’ve always wanted to be a serial entrepreneur who built and sold lots of companies. It wasn’t until my mid twenties when I was in the throws of my third company that the “selling” part was amplified.

Here’s what used to happen to me:

  1. Start a company, find customers, hire employees, start making real money
  2. Someone approaches about buying the company
  3. Fall in love with the idea of having millions in the bank. Start thinking about traveling the world, buying private islands, and never working again
  4. Become paranoid that if I don’t sell soon, I may screw up the company, miss my chance at #3, and end up sleeping on my sister’s couch instead.

I’ve come to find that this is a common experience with 80% of my entrepreneur friends AND is what drives them to ultimately sell GREAT companies to not so great companies who then run them into the ground (which is bad for customers, employees, and society as a whole). In fact, I’m surprised by how many of my friends (a good 30%+) have bought back the companies they’ve sold after they’ve been run down.

Plus, for companies that are profitable and growing, the economics almost never make sense to sell. Here’s an example of a company that sells for 10x earnings (which is considered a GREAT multiple for most private companies under $10 million in revenue):

$1 million profits/EBIT
$600,000 after-tax profits

$10 million = sell company for 10x EBIT
$8 million after-tax (20% cap gain)
$640,000 = 8% return on the re-invested $8 million
$384,000 after-tax return each year

$384,000 spendable income after selling vs. $600,000 by continuing to operate. Unless, you are planning on eating into your assets, you’ll be taking home almost half what you used to.

It’s even worse is if the company is growing, for example:
20% growth/year over 5 years
$2.5 million profits
$1.5 million after-tax profits

$1.5 million take-home each year versus the $384,000 off the reinvested assets from the sale 5 years earlier. PLUS, the company as an asset is worth $15 million MORE now! AND your customers and employees are happier that a big parent company DIDN’T run things into the ground!

My intent with companies that I’m involved with now is to get them to profitable growth as quickly as possible, build GREAT companies that customers and employees want to shout from the rooftops about, and NEVER sell them!!… a little bit different from that kid who dreamed of building and SELLING companies.

On Monday I spoke at SXSW on the same topic to about 200 entrepreneurs and it hit me that we are in a world full of VC’s, private equity, investment bankers, attorneys who love to promote “flipping” companies because that’s how they make money. And there’s not many voices out there promoting the idea of holding onto and growing companies for life. I was amazed by the energy that erupted from this room of entreprenuers to hear a different, maybe more fulfilling option.

So I’ve come to the conclusion that Richard Branson & Warren Buffet have it right… if a company is profitable and growing, the best holding period is FOREVER!

Leave a Reply