Many entrepreneurs dream of selling up and sailing off into the sunset, an image that’s glamorized in the media. But selling a business doesn’t always make financial or economic sense. Upon a sale’s completion, the former owner loses cash flow and control and has to pay tax on their gain. What remains might not have been worth it. Rather than selling up and cashing out completely, entrepreneurs can explore other ways of getting the benefits of selling whilst still owning the asset.
Coran Woodmass is the founder of Billion Dollar Exits, a boutique consulting firm that helps founders uncover creative options to take 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 multiple companies in the M&A industry, and invested in others, Woodmass understands the nuances of acquisition and its alternatives.
“Most founders feel there are only two options: grow their business or sell,” but Woodmass shares four alternatives available to every founder that could make more sense.
Selling a business means you give up control but may be required to stay during an earn-out period, which can be up to five years. An alternative to this is exploring creative ways to access liquidity whilst still maintaining control. In his book, Stretchy Little Black Pants, Lululemon founder Chip Wilson wrote about his regret of selling his business to a private equity firm. He reflects 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 business, which ultimately happened.
In practice, explained Woodmass, this means, “borrowing money secured against your business assets, that you pay back over a period of time.” The bank gives you cash 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 onto a great business, this could unlock scale without denting your equity; assuming you are ready for the challenge and want to grow your business.
Sell and maintain control
“Selling doesn’t need to mean giving up control,” explained Woodmass. He pointed to Gravitiq, a UK-based health and wellness company, whose team he advises. “The founders sold their first brand to their new business (allowing them to withdraw cash personally) and still have majority control and ownership of the new business.” They have since raised $55 million from investors to help scale and acquire other health and wellness brands. In the M&A world, this is known as recapitalization.
Making clever use of company structure combined with honesty and openness with investors can mean you have your cake and eat it too. Ascertain what is for sale and why. Think about why you want to sell. For many, the cash in their bank rather than their business bank account is key; it means they can make big personal purchases. It might be that freeing up the cash rather than selling shares achieves this goal.
Acquire instead of sell
Could it be possible that the reasons you want to sell match the benefits of acquiring instead? A new reality, a new challenge, a new team. Could you purchase one or more other businesses and roll them up together, to achieve all these things? An entrepreneur who feels stagnant or bored might seriously consider this route.
“One of our clients did this,” said Woodmass. “They shifted their focus to acquiring other firms as a way to grow, after realizing that they were trying to sell because they had become bored of their business in its current form.” There are plenty of businesses for sale, there are plenty of owners looking to retire. In your industry, could you buy your competitors? Could you look at people doing the same as you in another country, with different technology or an alternative customer base? Once you put your mind to it, you might find a new plan; one that you can’t wait to get going with.
Invest along the way
If a business is worth selling it has to be profitable. If it’s 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 his way to becoming a billionaire. Woodmass explained that DeJora, “learned the hard way to take the profit out of each business, regardless of how much potential upside there was, to invest for his family.” DeJora’s chosen vehicle 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 down the line you could also consider investing in other businesses via angel investing or syndicates where high returns might bring the benefits that selling would have done. Your risk is spread, your future payout could be high, and you maximise your chance of freeing up your time in the future, should one of your investments pay off in a big way.
If you’re seriously considering selling your business, get clear on exactly why. It’s clear that there are several other ways to leverage your business for greater cashflow if that’s your primary goal. When selling your business, ideally you enter negotiations from a position of strength. By leveraging debt to grow your business, restructuring your assets, acquiring other companies and investing along the way, you’ll likely be in a stronger position with a better business, able to command a higher sale price and better terms. Going forward with just one of these alternatives to selling might achieve all the upsides with none of the down; leaving you wondering why you ever wanted to sell in the first place.