Many entrepreneurs dream of selling and sailing into the sunset, an image glorified in the media. But selling a business doesn’t always make financial or economic sense. When a sale is completed, the former owner loses cash flow and control and must pay taxes on his profits. What’s left may not have been worth it. Instead of selling and cashing in in full, entrepreneurs can explore other ways to reap the benefits of selling while still owning the property.
Coran Woodmass is the founder of Billion Dollar Exits, a boutique consulting firm that helps founders discover creative options for taking chips off the table without selling their business or relinquishing control. They also work with clients to scale their business using M&A strategies. Woodmass has founded multiple companies in the M&A industry and invested in others and understands the nuances of acquisition and the alternatives.
“Most founders believe there are only two options: grow or sell their business,” but Woodmass shares four alternatives available to any founder that might make more sense.
Selling a business means giving up control, but may need to stay for an earn-out period, which can last up to five years. An alternative to this is exploring creative ways to access liquidity while maintaining control. In his book, Stretchy Little Black Pants, Lululemon founder Chip Wilson wrote that he regretted selling his company to a private equity firm. He considers that if he had used debt against the company to take chips off the table, he would have given his family security without losing control of the company, which eventually happened.
In practice, Woodmass explains, this means “borrowing money that is secured against your assets, which you repay over a period of time.” The bank gives you cash and you pay it back from future profits. You do not give up shares in the company, but you do pay interest. If you have a great business, it can unlock scale without denting your equity; assuming you are up for the challenge and want to grow your business.
Sell and stay in control
“Selling doesn’t have to mean giving up control,” Woodmass explains. He pointed to Gravitiq, a UK-based health and wellness company, whose team he advises. “The founders sold their first brand to their new company (allowing them to personally withdraw money) and still have majority control and ownership of the new company.” Since then, they have raised $55 million from investors to help scale up and acquire other health and wellness brands. In the M&A world, this is known as recapitalization.
Making smart use of the corporate structure combined with honesty and openness with investors can mean eating and eating your pie. Find out what’s for sale and why. Think about why you want to sell. For many, the money in their bank is more important than their business bank account; it means they can make big personal purchases. It may be that this goal is achieved by freeing up the money rather than selling stock.
Acquire instead of sell
Could it be that the reasons why you want to sell match the benefits of buying? A new reality, a new challenge, a new team. Could you buy one or more other companies and roll them up together to accomplish all of these things? An entrepreneur who is stagnant or bored might seriously consider this route.
“One of our customers did this,” Woodmass says. “They shifted their focus to acquiring other companies as a way to grow after realizing that they were trying to sell because they were fed up with their business as it stands.” There are plenty of businesses for sale, there are plenty of owners looking to retire. Could you buy your competitors in your industry? Can you look at people doing the same as you in another country, with different technology or a different customer base? Once you’ve set your sights on it, you may find a new plan; one you can’t wait to get started with.
Invest on the go
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, told his story of being homeless three times on the road to becoming a billionaire. Woodmass explained that DeJora, “learned the hard way to get the profit out of any business, no matter how much potential there was, to invest for his family.” DeJora’s chosen vehicle is now real estate, which typically has tax breaks for entrepreneurs.
By reinvesting your profits into other cash-generating projects, you can increase your returns. Moving on, you might also consider investing in other companies through angel investing or syndicates where high returns could bring the benefits that selling would have had. Your risk is spread, your future payout can be high and you maximize your chance to free up your time in the future should one of your investments pay off.
If you’re seriously considering selling your business, you need to make it clear why. Obviously there are several other ways to use your business for greater cash flow if that is your primary goal. Ideally, when you sell your company, you enter the negotiations from a strong position. By leveraging debt to grow your business, restructure your assets, acquire other businesses and invest along the way, you will likely be in a stronger position with a better company, able to deliver a higher selling price and to enforce better terms. Going forward with just one of these selling alternatives could achieve all the benefits without any of the drawbacks; making you wonder why you ever wanted to sell.