Know When To Sell A Business Versus Trying To Grow It

Very few things can be as rewarding as coming up with a business idea all on your own, getting a plan together to build it, and seeing it take off.

But is this business that you’ve built going to be something you’ll own for the rest of your life?

Can you run a business once it gets very large, or should you be prepared to sell it or exit it?

These are questions nearly every entrepreneur has to answer and you must answer them for yourself.  You have to consider what your business management strengths are and figure out what your long-term goals are.

Understand That Many Entrepreneurs Will Sell A Business At Some Point

Many entrepreneurs – even successful ones – will go through periods of failure in their first several businesses and either close shop or sell them. Sure, there are some who can build their first business and keep it in their family for generations to come, but most will go through multiple businesses over their lifetime.

Why is this?

While many entrepreneurs have great ideas, they may not be prepared at the outset of their career to manage a large company and make all the important decisions that come with it, or even have a roadmap for overtaking their competitors. So if you’re going to be running your business for the long haul, you’ll need to keep in mind all the management challenges that will come with that. If you’re not sure you’re up for them, you should be ready to sell.

Know The Aspects That You’ll Need To Have To Grow A Business

Starting a business is one thing, but what do you have to do to grow a business? There are many areas you have to be savvy with to know how to do this, but being a savvy marketer and financial guru can be especially important. Consider the following aspects for growing a business:

1. Know who to hire

As a business gets larger, you’re going to have to hire more people to manage it. Would you know who to look for? Would you consider hiring consultants or looking into talent acquisition firms for bringing in new managers? These are the risks you have to consider.

2. Know how to budget and invest your capital

Financial management is everything when a business needs to grow. You’ll need to know when and where to invest your capital, and when slow periods or tough times come you’ll need to know how to scale back and weather the drought. Sustainable businesses have plans for tough financial times and will have their funds managed correctly to come out even stronger.

3. Know how to look at data

Every business is going to need to do market research and know-how to find the correct data from that research. That’s because effective marketing and branding are paramount to growing a business, and you will need to be fully invested in a great marketing and analytics strategy if you’re going to do so.

Ultimately, you’ll one day come to a fork in the road and ask yourself this question:

do I have the financial or motivational requirements needed to take this business to the next level?

If yes, then pursue growth.  If no, and you meet a buyer who does have both requirements, then you now know when to sell a business and move on to something else.

When And How You Should Sell A Business

Knowing when to sell a business could depend either on where it’s at in terms of its growth phase, or where you’re at in your life goals. Maybe you’ve not had quite the success launching it that you intended to and feel it’s time to pursue another idea. Maybe you’ve taken it from inception to becoming fully operational but you feel that’s the best you can do with it. Maybe you even have considered taking it public or selling to a private equity firm and feel you need to step down, or maybe you’ve met your goals and now want to retire.

Depending on the size and structure of your business, there are multiple ways you could sell it.

1. Through a business broker

For smaller businesses that are mostly locally operated or have a certain limit in revenue and cash flow, selling through a broker can be the easiest and most common way to go. However, does it mean it’s an effective way to sell?  According to the International Business Brokers Association:

• 70% of businesses are considered non-saleable
• 48% of the businesses on the market won’t sell
• Brokers turn away from 1 to 10 unqualified buyers per seller

Before you contract with a broker, consider the likelihood of a successful sale. If it’s low, you might need to consider an exit strategy like selling to a private investor.

2. Through an M&A transaction

Maybe you have been lucky enough to be approached by a buyer who realizes your business may not have the resources to keep growing on its own, but feels it would have value as a subsidiary of their company. For big business acquisitions such as this, an investment bank will usually oversee the merger, and if you want to sell your business but still be involved in it, you can usually do so in cases like this. Be aware though that if shareholders and an executive committee are involved in this transaction, they’ll likely have considerable authority over your business now.

3. Directly to A Private Investor

The two main advantages of selling directly to a private investor are 1) you can get more creative in your offer and 2) the investor is typically more experienced in growing businesses.

The problem with a broker is that they’ll typically create a deal that yields the broker the highest commission as that’s how they’re paid.  This is why 90% of businesses listed through brokers never sell.  Also, maybe instead of a one-time lump sum payment, receiving installment payments could be more beneficial for you in the long-run.  Dealing with a private investor can give you more options and yield you a better long term return.

Summary of Know When To Sell A Business Versus Trying To Grow It

Many great and famous entrepreneurs have sold their first business so they could move on to something bigger and better.  Elon Musk sold x.com so he could create electric cars and build spaceships.  Just as very few employees are still at the first job they ever took, very few entrepreneurs are still with the first company they ever started up.  There’s nothing wrong with selling and starting over with something else if you feel you don’t have the finances or motivation to grow the business to the required next level.

If you have any questions about when to sell a business versus trying to grow it, please feel free to contact us.