In 2009 I started Financial Samurai. Little did I know back then that this website would grow into a significant money maker. Financial Samurai gave me the courage in 2012 to leave my day job in banking to pursue entrepreneurship.
After 10 years of running the site, I began to wonder whether selling my business was the right move. After all, the stock market, real estate market, and economy have all recovered nicely.
Perhaps now is the time to cash out? If you’ve built a business and are thinking about selling, here are all the questions and considerations to ask and think about before you do.
You want to minimize your regret of selling your business because many people who do sell wish they hadn’t once the payback period was reached.
Questions To Ask Yourself Before Selling A Profitable Business
Here are eight questions to ask yourself before selling your profitable business.
1) Is the valuation attractive enough? You must consider the valuation multiple compared to the overall S&P 500 and companies in your space. You must also consider the payback period and your likelihood of lasting beyond the payback period if you don’t sell. The stronger your expected future earnings growth, the higher the valuation multiple you should demand.
Wise public companies buy promising private companies at lower valuations. If a public company is trading at 20X earnings, it should buy private companies trading at lower earnings multiples with higher growth rates all day long. If it does, each acquisition will automatically be earnings accretive.
For illustrative purposes, let’s say someone offers me $6 million based off 6X operating profit of $1 million. If I can grow operating profit by 20% a year, the operating profit will have grown to $2.49 million after five years. In other words, I would have ended up only selling my business for 2.4X operating profit, which would be like getting mugged in a dark alley!
And if I ended up selling for 6X operating profit five years from now, I could get $14.94 million instead of just $6 million. Plus, there’s all the money I would have made over the five years as well.
2) What does your company’s profitability outlook look like? You either have a business that is losing money, but hopefully growing at a fast pace or you have a cash generating business that is usually growing at a more steady pace. If you have a money-losing business that isn’t growing, then you need to sell ASAP. If you have a cash cow that’s growing, it’s best to hold on or ask for the moon.
A money-losing business is unsustainable over the long term unless the business can continuously raise money from outside investors to fund operations. Uber, is a great example of a fast grower that lost $1.8 billion in 2018. Yet, because they are able to raise ~$9 billion from its IPO, the company should be able to fund its operations for at least five more years given its losses are shrinking (lost $2.2 billion in 2017).
Look at the chart below. It shows the different amounts of capital needed to generate $55,000 and $20,000 in annual income at different interest rates. By a significant margin, cash cows are much more valuable today than they would be if interest rates were higher.
3) What are your personal goals? Do you want to sell for as large of a profit as possible or build a legacy for your family? If your desire for maximum profits is strong, then selling your business may make more sense if you get the right offer. If you desire to build a long-term business because it gives you purpose and joy, then selling your business makes less sense. Decide what your personal goals are for your business.
My purpose for Financial Samurai is to have a creative outlet to share my thoughts on a weekly basis. It feels good to get thoughts on paper and hear different perspectives from the community. To be able to formulate an idea, put it in writing, and releasing it to the world is very gratifying.
A new goal is to run Financial Samurai long enough to teach my boy about online media, communication, and entrepreneurship. As an overrepresented minority at top universities, I assume it will be tougher for him to get in. I assume he will also get discriminated against in the workplace due to an underrepresentation of minorities in leadership positions. Therefore, it’s nice to have an insurance policy to skip university and the matrix all together.
He might have zero interest in learning about online media, but at least I can talk to him about the importance of creativity, consistency, and work ethic. A small business has many of the same departments as a large business e.g. finance, marketing, sales, production, etc.
Finally, what a wonderful way to communicate with family and friends long after I’m gone. I remember replaying over and over an old voicemail recording of a middle school friend who shockingly passed away in a car accident. If I were to die today, at least my wife and toddler will have hundreds of recordings and thousands of articles to go through.
4) What is your view of the future. Do you see your business growing or fading? Can you create different products or revenue streams due to the strength of your brand? What are some new technologies that might disrupt your existing business? Are you capable of adapting?
Businesses fade away all the time. The murkier the future, the more you should consider selling.
If you can build a brand, your business will do even better in the future. Think about how many different business lines Virgin is in. Richard Branson has built an incredible, edgy brand that has enabled him to get into music, transportation, hotels, and more.
5) Will the money change your life? If the sale of your business can significantly change your life for the better, then selling is absolutely an attractive decision. If the financial windfall doesn’t do much for your life, then you will likely feel a great let down because doing something mainly for money tends to feel empty.
List out some of the things you could buy once you sell your business:
- A bigger house
- Pay off all debt
- Private school tuition
- Fancier vacations
- Nicer clothes
- Care for your aging parents
- A nice car
Compare what you could buy with the downside of no longer having your business. Is it worth it? I did a similar exercise when I gave up $1 million in salary to be a stay at home dad for two years. I felt it was absolutely worth spending time with my boy from ages 0-2.
6) Will you regret not selling if the market turns south? Fantastic selling opportunities open up only so often. If you pass, can you live with your decision that you could have gotten so much more if you sold earlier? Do you have the patience to wait for another 10 years for the next fantastic selling opportunity?
For example, Yahoo was once once worth over $100 billion and eventually sold itself to Verizon for only $5 billion. The good times don’t last forever and many big companies we once knew have gone away.
7) Will the new buyer be a good steward? You don’t want to sell your business to anybody. Instead, you want to sell your business to someone who believes in your vision and carries out many of the things you’d like to do, but don’t have the ability or energy to do on your own.
Consider selling your business similar to giving away your daughter or son’s hand in marriage. You’re definitely not going to let your daughter or son marry a scumbag.
The same thing goes with selling your childhood home. It feels much better selling to another family who you know will raise their children and take care of the home, instead of to a random investor who plans to gut the house and flip it for a profit.
A Profitable Business Is More Valuable Than You Think
Every dollar you earn in a business multiplies your net worth by much more than just that dollar. When you are paid a dollar as an employee, your net worth increased by a dollar (ignoring taxes, etc).
When you earn a dollar in your business, your net worth increases by two, or three, or six or 12 or more dollars depending on the multiple of your industry because you are increasing the market value of the business itself. Earning money in a business is truly like steroids for your net worth.
Looking beyond the numbers, you might be taking for granted how much joy your business gives you. The joy you get from creating something on your own far outweighs the joy of making money working for someone else.
I know of several people who sold their online businesses for the money and later became depressed because they didn’t have a purpose anymore. Many in the online media space tried to re-create the magic and failed. They became irrelevant.
In a sustained low interest rate environment, having a profitable cash cow is very valuable. If you have children, having a business where you can teach him or her the ropes is priceless. Think how wonderful it is to not have to rely on getting into a great university and getting a good job to survive and thrive?
Not a day goes by where I’m not thankful for launching Financial Samurai in 2009. I highly encourage everyone at least start their own website. It takes 30 minutes and costs $5 or less to start. It’s truly incredible how cheap and easy it is to start a website and start playing around with ideas today versus in the past.