Many entrepreneurs dream of selling up and sailing off into the sunset, an image that has been glamorized in the media. But selling a business doesn’t always make financial or economic sense. After a sale is completed, the former owner loses cash flow and control and must pay tax on their gain. What’s left might not have been worth it. Instead of selling and cashing out completely, entrepreneurs can explore other ways to get the benefits of the sale while still owning the asset.
Coran Woodmass is the founder of Billion Dollar Exits, a boutique consulting firm that helps founders discover creative options to take their chips off the table without selling their business or giving up control. They also work with clients to scale their business using M&A strategies. Having founded numerous companies in the M&A industry and invested in others, Woodmass understands the nuances of acquisition and its alternatives.
“Most founders think there are only two options: grow their business or sell,” but Woodmass shares four alternatives available to any founder that may make more sense.
Selling a business means you give up control, but you may be required to stay on for a profit period, which can be up to five years. An alternative to this is exploring creative ways to access liquidity while still maintaining control. In his book, Stretchy Little Black Pants, Lululemon founder Chip Wilson wrote about his regrets about selling his business to a private equity firm. He reflects that if he had used the company’s debt to take the chips off the table, it would have provided security for his family without losing control of the business, which he ultimately did.
In practice, Woodmass explained, this means “borrowing money secured against your business assets, which you pay back over a period of time”. The bank gives you money and you pay it back from future profits. You don’t give up shares in the company, but you do pay an interest rate. If you’re in a big business, this can unlock scale without hurting your capital; assuming you are up for the challenge and want to grow your business.
Sell and keep control
“Selling doesn’t mean giving up control,” Woodmass explained. He told about Gravitiq, a UK-based health and wellness company whose team he advises. “The founders sold their first brand in their new business (allowing them to withdraw money personally) and still have majority control and ownership of the new business.” They have since raised $55 million from investors to help grow and acquire other health and wellness brands. In the M&A world, this is known as a recapitalization.
Clever use of company structure, combined with honesty and openness with investors, can mean you can have your cake and eat it too. Find out what’s on sale and why. Think about why you want to sell. For many people, the money in their bank rather than their business bank account is the key; means they can make large personal purchases. It may be that releasing cash instead of selling stock achieves this goal.
Buy instead of sell
Could it be that the reasons you want to sell match the benefits of buying? A new reality, a new challenge, a new team. Can you buy one or more other businesses and merge them together to achieve all these things? An entrepreneur who is feeling stagnant or bored may seriously consider this path.
“One of our customers did that,” Woodmass said. “They shifted their focus to acquiring other firms as a way to grow as they realized they were trying to sell because they were bored with their business in its current form.” There are a lot of businesses for sale, there are a lot of owners looking to retire. In your industry, can you outbid your competitors? Can you look at people doing the same thing as you in a different country, with different technology or an alternative customer base? Once you make up your mind, you can come up with a new plan; one you can’t wait to get started on.
Invest along the way
If a business is worth selling, it must be profitable. If it is profitable, those profits should be invested wisely. John Paul DeJora, co-founder of John Paul Mitchell Systems, shared his story of being homeless three times on his way to becoming a billionaire. Woodmass explained that DeJora, “learned the hard way to take the profit out of any business, no matter how much potential it had, to invest in his family.” DeJora’s vehicle of choice is now real estate, which typically has tax benefits for entrepreneurs.
Investing your profits back into other cash flow generating projects helps you compound your returns. Further, you can also consider investing in other businesses through angel investing or syndicates where higher returns can bring the benefits that selling would have brought. Your risk is spread, your future payout can be high, and you maximize your chance of freeing up your time in the future if one of your investments pays off big.
If you are seriously considering selling your business, make it clear exactly why. Obviously, there are several other ways to boost your business for more cash flow if that’s your primary goal. When selling your business, ideally you enter the negotiations from a position of strength. By using debt to grow your business, restructuring your assets, acquiring other companies and investing along the way, you will likely be in a stronger position with a better business, able to command a higher price. higher sales and better conditions. Going forward with just one of these alternatives to selling can achieve all the upsides with none of the downsides; leaving you wondering why you ever wanted to sell in the first place.