Should we sell our business?

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2016
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Should we sell our business?

Post by 2016 » Fri Jul 13, 2018 6:44 pm

We’re a married couple in our late 40s with a teenager. We have $1.8M invested and have $700k in real estate (includes primary residence). Together we own and operate a business with profits of around $300k a year. In the last two years, we’ve found a way to rapidly expand the business and increase revenues. Based on the first 10 years of our business, we predict that in 5-7 years, our profits may approach a million a year (of course, no guarantees).

A key employee approached us a few months ago and expressed interest in becoming a co-owner, or an outright owner. His spouse is a doctor and they have significant cash flow available. We were planning on retiring in 7 years. But now, we may have the option to sell this business to him. We would work during a short transition period and then be completely out of the business. That sounds like a possibly good exit strategy. What would we do next? We don’t know, but we would enjoy figuring that out.

Because our expansion in the last 2 years has hurt our cash flow, the current valuation of the business is around $900k. We believe the true value of the business to be much higher. Every business owner probably believes their business is worth more than market value, I would imagine. Our “walkaway price” is $2.0M. If he gives us that amount, we feel that’s a fair value of the company. He’s concerned that if we wait to sell it to him in 7 years, the price will be unattainable for him. He feels that if he’s helping us grow this business year after year, he should be a partner with us. I don’t disagree, but we don’t want partners. We want to be 100% owners, and then 0% owners.

Questions:
Would you walk away from a thriving business for $2M, when chances are pretty good, it’ll be worth much more than that in 5-7 years?

What price would it be worth to you to walk away from this?

Would you risk losing a good employee by not offering part ownership? We’ll discuss profit sharing with him if we don’t sell.

il0kin
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Re: Should we sell our business?

Post by il0kin » Fri Jul 13, 2018 6:49 pm

Assuming it went through tomorrow, 3.8M in liquid assets and 700k in real estate in your late 40's for a total NW of 4.5M? Yup, sounds like a dream come true to me. Bird in the hand is worth two in the bush. Sell it and enjoy your early retirement.

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Sandtrap
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Re: Should we sell our business?

Post by Sandtrap » Fri Jul 13, 2018 7:10 pm

2016 wrote:
Fri Jul 13, 2018 6:44 pm
We’re a married couple in our late 40s with a teenager. We have $1.8M invested and have $700k in real estate (includes primary residence). Together we own and operate a business with profits of around $300k a year. In the last two years, we’ve found a way to rapidly expand the business and increase revenues. Based on the first 10 years of our business, we predict that in 5-7 years, our profits may approach a million a year (of course, no guarantees).

A key employee approached us a few months ago and expressed interest in becoming a co-owner, or an outright owner. His spouse is a doctor and they have significant cash flow available. We were planning on retiring in 7 years. But now, we may have the option to sell this business to him. We would work during a short transition period and then be completely out of the business. That sounds like a possibly good exit strategy. What would we do next? We don’t know, but we would enjoy figuring that out.

Because our expansion in the last 2 years has hurt our cash flow, the current valuation of the business is around $900k. We believe the true value of the business to be much higher. Every business owner probably believes their business is worth more than market value, I would imagine. Our “walkaway price” is $2.0M. If he gives us that amount, we feel that’s a fair value of the company. He’s concerned that if we wait to sell it to him in 7 years, the price will be unattainable for him. He feels that if he’s helping us grow this business year after year, he should be a partner with us. I don’t disagree, but we don’t want partners. We want to be 100% owners, and then 0% owners.

Questions:
Would you walk away from a thriving business for $2M, when chances are pretty good, it’ll be worth much more than that in 5-7 years?

What price would it be worth to you to walk away from this?

Would you risk losing a good employee by not offering part ownership? We’ll discuss profit sharing with him if we don’t sell.
You may find your answers as you ponder these questions:
1. Given that you are happy with the price of a "complete" buyout. What will you do after that? Retire? Open another business?

2. You have good reason to be 100% or 0% owners. As a retired businessman, I would not want to take on the problems that could arise in a "partnership" both personal and financial. Or, the unknowns and stress of a "payment plan". Given that, if your "key employee" walks, do you have a replacement or someone you can groom to replace? Often, a key employee for many years becomes "entitled" beyond actual merit. Is this so?

3. If the "key employee" walks, and then 1 year from now you decide to sell. How much could you sell the business for? Is it a desirable business that is easy to sell? Is it "turnkey"?

4. Every thriving business worth 2 mil has the potential to be valued much higher at a later date. Maybe. Would a lateral move be valuable to you to free up personal time, gain long term stability, etc. For example: selling your business for 2 mil. Investing in an investment portfolio and R/E income property. Pursuing slow and steady diversified growth and income in another venue?

5. No one can ascertain how much a business is worth. It is worth "X" dollars to the buyer that appreciates its worth regardless of annual proceeds, etc. Would "you" be happy walking away with $900k, $1.5 mil, ???? Perhaps you don't want to walk away/sell at any price because you enjoy your business?

6. As an aside, an offer to buy or inquiry to buy is far different than a solid cash in hand offer with a contract. You'll never know if the offer to buy is solid unless you follow through to some degree. You can always change your mind. And, it may not be a valid offer in the first place. The person's spouse is the source of funds. So that dialogue has to happen.

FWIW: I sold a substantial R/E income property business after 35+ years of building it up little by little. At the time, I regretted it because I never thought I'd retire. But, things change. Other opportunities appear. Perhaps it would be good to project forward a bit toward your long term goals and beyond.

I hope these meanderings are helpful to you.
Aloha
j

2016
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Re: Should we sell our business?

Post by 2016 » Fri Jul 13, 2018 7:20 pm

il0kin wrote:
Fri Jul 13, 2018 6:49 pm
Assuming it went through tomorrow, 3.8M in liquid assets and 700k in real estate in your late 40's for a total NW of 4.5M? Yup, sounds like a dream come true to me. Bird in the hand is worth two in the bush. Sell it and enjoy your early retirement.
That does sound great. But at the same time, building it up and selling for 5X that in 7-10 years sounds even awesome-er-er. We're pretty cautious, and it may be tough to turn down such an offer. Would we have regrets? Possibly.

ResearchMed
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Re: Should we sell our business?

Post by ResearchMed » Fri Jul 13, 2018 7:34 pm

2016 wrote:
Fri Jul 13, 2018 7:20 pm
il0kin wrote:
Fri Jul 13, 2018 6:49 pm
Assuming it went through tomorrow, 3.8M in liquid assets and 700k in real estate in your late 40's for a total NW of 4.5M? Yup, sounds like a dream come true to me. Bird in the hand is worth two in the bush. Sell it and enjoy your early retirement.
That does sound great. But at the same time, building it up and selling for 5X that in 7-10 years sounds even awesome-er-er. We're pretty cautious, and it may be tough to turn down such an offer. Would we have regrets? Possibly.
About regrets... whichever decision you make, you won't know how the other decision "would have worked out". That's just life, so try to keep that in mind.

There's just no guarantee that the business would ramp up that well. It could be slower, or almost stall.
Or worse, there could be some dreadfully expensive catastrophe :shock: Or... it could possibly end up twice that much. Impossible to know in advance.

But what about non-financial concerns: Will you miss working there, or have you "done it" now, built it up nicely, etc., and time to move on, or perhaps just have less pressure?

IF you have your "walk-away" figure and he actually offers that... just be cautious before turning it down.
There's something that caused you to put that figure on an exit point (for better or worse, etc., but you came up with it...).

Good luck.
It's a nice "problem" to have, if there must be a "problem".

RM
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2016
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Re: Should we sell our business?

Post by 2016 » Fri Jul 13, 2018 7:39 pm

Sandtrap wrote:
Fri Jul 13, 2018 7:10 pm
You may find your answers as you ponder these questions:
1. Given that you are happy with the price of a "complete" buyout. What will you do after that? Retire? Open another business?

2. You have good reason to be 100% or 0% owners. As a retired businessman, I would not want to take on the problems that could arise in a "partnership" both personal and financial. Or, the unknowns and stress of a "payment plan". Given that, if your "key employee" walks, do you have a replacement or someone you can groom to replace? Often, a key employee for many years becomes "entitled" beyond actual merit. Is this so?

3. If the "key employee" walks, and then 1 year from now you decide to sell. How much could you sell the business for? Is it a desirable business that is easy to sell? Is it "turnkey"?

4. Every thriving business worth 2 mil has the potential to be valued much higher at a later date. Maybe. Would a lateral move be valuable to you to free up personal time, gain long term stability, etc. For example: selling your business for 2 mil. Investing in an investment portfolio and R/E income property. Pursuing slow and steady diversified growth and income in another venue?

5. No one can ascertain how much a business is worth. It is worth "X" dollars to the buyer that appreciates its worth regardless of annual proceeds, etc. Would "you" be happy walking away with $900k, $1.5 mil, ???? Perhaps you don't want to walk away/sell at any price because you enjoy your business?

6. As an aside, an offer to buy or inquiry to buy is far different than a solid cash in hand offer with a contract. You'll never know if the offer to buy is solid unless you follow through to some degree. You can always change your mind. And, it may not be a valid offer in the first place. The person's spouse is the source of funds. So that dialogue has to happen.

FWIW: I sold a substantial R/E income property business after 35+ years of building it up little by little. At the time, I regretted it because I never thought I'd retire. But, things change. Other opportunities appear. Perhaps it would be good to project forward a bit toward your long term goals and beyond.

I hope these meanderings are helpful to you.
Aloha
j
Thanks for your thoughts, J.

1. The "What's next?" is a good question. Ease into full retirement is a pretty good answer. I think we could both downshift to a slower lifestyle.

2. If this key employee walks, it's not that big of deal, honestly. We could groom a replacement in pretty quick order. However, there is another key employee, "M", that would be very bad to lose. If she left, it would create a significant gap. For the last two years, we asked her to think about what salary she thinks she deserves at her annual review, and then we gave her that. We plan on doing that again this year for her.

3. I believe in one year, the business will be worth about $2.5M. Selling it will be difficult. Need to be a professional in this field to purchase it. (think dentistry, or veterinary, or chiropractic). But it somewhat runs itself (with the current team we have in place), and is not rocket science.

4. Not sure what you mean by a lateral move. This is a niche business, and is pretty unique. We would invest the proceeds using our current Boglehead asset allocation.

5. We've done many mental exercises, to try to figure out in our gut, what we'd feel happy selling it for. We've narrowed it down to between 2.0M and 2.5M, but there are so many variables and unknowns. We do enjoy the business, but would be happy to leave it behind for the right price.

6. I understand. For all we know, this is just a ploy to get better profit sharing.

We're holding out hope that if we do keep it (and that's the conservative, 'normal' thing to do), there is a chance it could be worth significantly more in 5-7 years. That chance really excites us. It's our one, last chance to get us into a significantly different lifestyle and lack of money worries.

Thanks for your feedback. It's appreciated.

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Re: Should we sell our business?

Post by golfCaddy » Fri Jul 13, 2018 7:46 pm

How much work do you and your spouse have in running the business? If you hired someone to do everything you did, how much would be left in profits out of that $300k?

2016
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Re: Should we sell our business?

Post by 2016 » Fri Jul 13, 2018 7:47 pm

ResearchMed wrote:
Fri Jul 13, 2018 7:34 pm
About regrets... whichever decision you make, you won't know how the other decision "would have worked out". That's just life, so try to keep that in mind.

There's just no guarantee that the business would ramp up that well. It could be slower, or almost stall.
Or worse, there could be some dreadfully expensive catastrophe :shock: Or... it could possibly end up twice that much. Impossible to know in advance.

But what about non-financial concerns: Will you miss working there, or have you "done it" now, built it up nicely, etc., and time to move on, or perhaps just have less pressure?

IF you have your "walk-away" figure and he actually offers that... just be cautious before turning it down.
There's something that caused you to put that figure on an exit point (for better or worse, etc., but you came up with it...).

Good luck.
It's a nice "problem" to have, if there must be a "problem".

RM
Yes. If we do sell it, I believe the prospect of rapid growth and continued expansion and excellence may falter. Call it a bit of arrogance, but my wife and I are a pretty good team, and are decisive, analytical, quick to change course, and seem to be pretty good decision makers. I've come to realize that small business owners rise or fall based on their ability to make good, quick decisions. Like 4 times a day.

Of course, with us out of the way, it could possibly grow into areas that we never foresaw, faster and better. We don't confuse strategy with outcome. Pick the good strategy... and then the outcome may be better or worse, but de-linking those two avoids the "woulda / coulda" second-guessing issues.

We're both okay giving it all up. It's a pretty radical pivot point that just presented itself, the idea of retiring so early. A bit scary, a bit exciting.

2016
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Re: Should we sell our business?

Post by 2016 » Fri Jul 13, 2018 7:52 pm

golfCaddy wrote:
Fri Jul 13, 2018 7:46 pm
How much work do you and your spouse have in running the business? If you hired someone to do everything you did, how much would be left in profits out of that $300k?
You sound like an investment banker. :-) When going through the analysis with him, we quantified the value that we bring to the company (and need for replacement). Then, added up our compensation and subtracted that. The delta is $70,000 a year extra that would be needed without us doing what we do. So, maybe the cash flow is $230k (times 5 to give $1.2M value. However, our new expansion's revenue is just starting to occur, and that isn't priced into the value yet. Adding in that, and that's why we're getting closer to the $2M figure.

2016
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Re: Should we sell our business?

Post by 2016 » Fri Jul 13, 2018 7:56 pm

Another question.. If we sell for $2M, and only $100k is for equipment and hard assets, leaving $1.9M for intangibles, what is the tax rate we'll pay?

http://www.smallbiztaxadvisor.com/federal/top10.lasso

That link seems to put most of the sale price into just "long term capital gains" tax rate. Is that correct? That would be awesome!

student
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Re: Should we sell our business?

Post by student » Fri Jul 13, 2018 7:57 pm

I have never owned a business so my reply is probably worthless. If you think he is a trustworthy person, I would sell him the majority of the business and keep a small portion and be a silent partner, with the option to sell the remaining shares to him at the same valuation within 5 years.

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VictoriaF
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Re: Should we sell our business?

Post by VictoriaF » Fri Jul 13, 2018 8:06 pm

I don't have any experience with running business but I am reading a lot of books and papers on behavioral economics and related fields. Concepts related to your situation are "inside view" and "planning fallacy."

When you take the inside view, you consider only what you know and what is in your control. You know how to run your business, you know the factors that may lead to a rapid growth in the next few years. You do NOT know what your competitors do, what the regulators are up to, what unfavorable news may hit your niche market. Likewise, with the planning fallacy, you use your best productivity to estimate the completion time. You don't consider potential setbacks such as diseases, family issues, and intervening urgent projects.

Some solutions to these problems have been proposed. For example, to take an "outside view" you should consider the base rate of success of niche businesses similar to yours. Another technique is to do a pre-mortem, i.e., to use your creativity to describe various scenarios that could destroy your business.

Doing these exercises and coming up with a low base rate and a pre-mortem will encourage you to sell the business to your employee, and greatly reduce any future regret, if the business does prosper.

Victoria
Last edited by VictoriaF on Fri Jul 13, 2018 8:10 pm, edited 1 time in total.
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ResearchMed
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Re: Should we sell our business?

Post by ResearchMed » Fri Jul 13, 2018 8:09 pm

2016 wrote:
Fri Jul 13, 2018 7:56 pm
Another question.. If we sell for $2M, and only $100k is for equipment and hard assets, leaving $1.9M for intangibles, what is the tax rate we'll pay?

http://www.smallbiztaxadvisor.com/federal/top10.lasso

That link seems to put most of the sale price into just "long term capital gains" tax rate. Is that correct? That would be awesome!
It could be very difficult for them to watch (silently!) as someone else makes decisions that differ from what they would have done. Even if it turns out fine or even better, they won't know that as the "other" (or "wrong"!) decisions are being made.

RM
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Rick Ferri
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Re: Should we sell our business?

Post by Rick Ferri » Fri Jul 13, 2018 8:14 pm

I am confused.

You said the current value of the business is $900k, but could be worth much more if and when the revenues increase. Then you said you’d offer to sell the business to an employee today for $2 mm, as if the growth has already occurred.

Why would you expect an employee to pay you more than double what any private investor would pay for same business today? Why aren’t you offering him or her the business for what you know it’s worth today, $900k ?
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F150HD
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Re: Should we sell our business?

Post by F150HD » Fri Jul 13, 2018 8:27 pm

retiring in 7 years....and this yields 300k per year. If you don't sell, and keep it for the 7 years, you'll essentially earn what you're going to sell it for? kinda a wash (somewhat of a simple view but....)

To me it all hinges on what specifically the business is and the probability it will fail when the market for your 'product' shifts. If you add more context you may get more fruitful replies.

Long story short....a family member had a business in a small town. It did awesome for years....had multiple offers to sell it along the way for profit. Eventually the market shifted and the business ended up crippled eventually it was nearly impossible to get rid of it. Became an absolute nightmare selling it off piece by piece. And, to parallel your reference to employee "M", this family members business had a similar person, when he left, thats when the business began going downhill.

Good luck, sounds like a good problem to have! Keep us updated on the outcome.

2016
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Re: Should we sell our business?

Post by 2016 » Fri Jul 13, 2018 8:32 pm

Rick Ferri wrote:
Fri Jul 13, 2018 8:14 pm
I am confused.

You said the current value of the business is $900k, but could be worth much more if and when the revenues increase. Then you said you’d offer to sell the business to an employee today for $2 mm, as if the growth has already occurred.

Why would you expect an employee to pay you more than double what any private investor would pay for same business today? Why aren’t you offering him or her the business for what you know it’s worth today, $900k ?
Thanks for weighing in, Rick.

The current value according to the bean counting investment bankers is $900k. This calculation didn't include revenue from our new locations in other parts of the US. So, each location (3 so far) cost about $45k to startup. Those costs were factored in, but none of the revenue was. (expansion is a very recent phenomenon). Since that evaluation 2 months ago, we've actually started turning a profit in 2 of those 3 regions. I know that in one year, our books will be cleaner. Revenues will be up. Profits will be up. We just need to get through this messy 2018 and then we can continue our expansion.

So, that's my logic. I priced in expansion and additional locations when the valuation didn't include those (yet).

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Rick Ferri
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Re: Should we sell our business?

Post by Rick Ferri » Fri Jul 13, 2018 8:52 pm

2016 wrote:
Fri Jul 13, 2018 8:32 pm
The current value according to the bean counting investment bankers is $900k. This calculation didn't include revenue from our new locations in other parts of the US....I priced in expansion and additional locations when the valuation didn't include those (yet).
Unless the bean counters are working for the buyer, you should not dismiss the $900 k. It’s likely closer to fair value than you want to admit.

That being said, you’re certainly entitled to negotiate with the buyer for a higher price based on any new increase in revenue from the other locations. However, $1.1 mm higher in two months is a little optimistic, IMO.

Based only on what you wrote in this thread, and if you want to continue working, your best investment is to continue with the business, IMO.
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Re: Should we sell our business?

Post by BogleBike » Fri Jul 13, 2018 9:00 pm

Based on your own statements - "money worries", keeping it is "our one chance" to be a higher financial level, clear belief that the $2 million value is approachable, "2.0 MM is our walk-away figure" - don't sell unless he coughs up $2MM. (I'd also calibrate my spending so there weren't money worries, but that's a personal decision.)

Tell the employee your logic, acknowledge that you want him to stay if he's happy, offer to give reasonable support towards a move if he's unhappy, and watch closely. If he's not happy, start your replacement search ASAP. No need to be cold or hurtful, but if he's not happy, you both need him to move on. He may dither, so be prepared. His dithering shouldn't be allowed to hurt the business, though his honesty otherwise suggests the fairest possible treatment during the replacement process.

I have no idea if you'll succeed in beating the $2 to 2.5MM, but you sound like that bridge is the one you'll regret not walking on.
Last edited by BogleBike on Fri Jul 13, 2018 9:03 pm, edited 1 time in total.

2016
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Re: Should we sell our business?

Post by 2016 » Fri Jul 13, 2018 9:02 pm

Rick Ferri wrote:
Fri Jul 13, 2018 8:52 pm
2016 wrote:
Fri Jul 13, 2018 8:32 pm
The current value according to the bean counting investment bankers is $900k. This calculation didn't include revenue from our new locations in other parts of the US....I priced in expansion and additional locations when the valuation didn't include those (yet).
Unless the bean counters are working for the buyer, you should not dismiss the $900 k. It’s likely closer to fair value than you want to admit.

That being said, you’re certainly entitled to negotiate with the buyer for a higher price based on any new increase in revenue from the other locations. However, $1.1 mm higher in two months is a little optimistic, IMO.

Based only on what you wrote in this thread, and if you want to continue working, your best investment is to continue with the business, IMO.
You are always the voice of reason. I hate that. :-) We are in a position of power in this transaction. We're fine continuing as owners. We're also fine selling at the price we think is reasonable (the "walkaway" price). If they don't take it, that's okay. If they take it, we feel good about it. I do think it's a bit premature to sell the business. In fact, we did a 20 slide PowerPoint deck telling him why we don't want to sell until 5-7 years from now. He countered that, saying basically: "Why should I continue working to expand and grow this company when I'm just increasing the cost of buying it in 7 years?" Seems like a valid argument. Truth be told. In 7 years, we'll put it up for sale, and we'll take the highest offer.

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Sandtrap
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Re: Should we sell our business?

Post by Sandtrap » Fri Jul 13, 2018 11:45 pm

2016 wrote:
Fri Jul 13, 2018 7:39 pm
Sandtrap wrote:
Fri Jul 13, 2018 7:10 pm
You may find your answers as you ponder these questions:
1. Given that you are happy with the price of a "complete" buyout. What will you do after that? Retire? Open another business?

2. You have good reason to be 100% or 0% owners. As a retired businessman, I would not want to take on the problems that could arise in a "partnership" both personal and financial. Or, the unknowns and stress of a "payment plan". Given that, if your "key employee" walks, do you have a replacement or someone you can groom to replace? Often, a key employee for many years becomes "entitled" beyond actual merit. Is this so?

3. If the "key employee" walks, and then 1 year from now you decide to sell. How much could you sell the business for? Is it a desirable business that is easy to sell? Is it "turnkey"?

4. Every thriving business worth 2 mil has the potential to be valued much higher at a later date. Maybe. Would a lateral move be valuable to you to free up personal time, gain long term stability, etc. For example: selling your business for 2 mil. Investing in an investment portfolio and R/E income property. Pursuing slow and steady diversified growth and income in another venue?

5. No one can ascertain how much a business is worth. It is worth "X" dollars to the buyer that appreciates its worth regardless of annual proceeds, etc. Would "you" be happy walking away with $900k, $1.5 mil, ???? Perhaps you don't want to walk away/sell at any price because you enjoy your business?

6. As an aside, an offer to buy or inquiry to buy is far different than a solid cash in hand offer with a contract. You'll never know if the offer to buy is solid unless you follow through to some degree. You can always change your mind. And, it may not be a valid offer in the first place. The person's spouse is the source of funds. So that dialogue has to happen.

FWIW: I sold a substantial R/E income property business after 35+ years of building it up little by little. At the time, I regretted it because I never thought I'd retire. But, things change. Other opportunities appear. Perhaps it would be good to project forward a bit toward your long term goals and beyond.

I hope these meanderings are helpful to you.
Aloha
j
Thanks for your thoughts, J.

1. The "What's next?" is a good question. Ease into full retirement is a pretty good answer. I think we could both downshift to a slower lifestyle.

2. If this key employee walks, it's not that big of deal, honestly. We could groom a replacement in pretty quick order. However, there is another key employee, "M", that would be very bad to lose. If she left, it would create a significant gap. For the last two years, we asked her to think about what salary she thinks she deserves at her annual review, and then we gave her that. We plan on doing that again this year for her.

3. I believe in one year, the business will be worth about $2.5M. Selling it will be difficult. Need to be a professional in this field to purchase it. (think dentistry, or veterinary, or chiropractic). But it somewhat runs itself (with the current team we have in place), and is not rocket science.

4. Not sure what you mean by a lateral move. This is a niche business, and is pretty unique. We would invest the proceeds using our current Boglehead asset allocation.

5. We've done many mental exercises, to try to figure out in our gut, what we'd feel happy selling it for. We've narrowed it down to between 2.0M and 2.5M, but there are so many variables and unknowns. We do enjoy the business, but would be happy to leave it behind for the right price.

6. I understand. For all we know, this is just a ploy to get better profit sharing.

We're holding out hope that if we do keep it (and that's the conservative, 'normal' thing to do), there is a chance it could be worth significantly more in 5-7 years. That chance really excites us. It's our one, last chance to get us into a significantly different lifestyle and lack of money worries.

Thanks for your feedback. It's appreciated.
You're welcome.
I think the highlighted quote above answers your question. Yes. That would be exciting to have the company go from $2.5 to something as exponential as $5-8 in 7 years and that amount would certainly make a difference in retirement lifestyle and security.
I reached a similar crossroads several years ago. However, though the business was growing, I was beginning to get a bit burned out on it. I think there's a certain point of value where as long as one is excited and passionate, there's an eagerness to hang on, to keep going. That's great. However, in the coming years there might be a point where value increase intersects with a feeling of "time to retire".
Good luck.
j

Bfwolf
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Re: Should we sell our business?

Post by Bfwolf » Sat Jul 14, 2018 12:16 am

I tend to agree with Rick that $2M sounds optimistic if you just had bankers say it's worth $900K. Do you have any indication that the buyer would pay $2M?

I think the concept of "enough" is important here too. More money is nice, but when you have enough, you have enough, right?

2016
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Re: Should we sell our business?

Post by 2016 » Sat Jul 14, 2018 7:15 am

Bfwolf wrote:
Sat Jul 14, 2018 12:16 am
I tend to agree with Rick that $2M sounds optimistic if you just had bankers say it's worth $900K. Do you have any indication that the buyer would pay $2M?

I think the concept of "enough" is important here too. More money is nice, but when you have enough, you have enough, right?
I loved the book, "Enough".

At this point, we haven't broached the "walkaway" price with him. In our internal financial meetings in the last year with him, where we review P&Ls, income statements, balance sheets, cash flow, etc. we internally have valued the company at $1.5M. That may be an anchor for him. However, we're consulting experts (on this board and some in the real world) before finalizing our response to him.

jminv
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Re: Should we sell our business?

Post by jminv » Sat Jul 14, 2018 7:39 am

The value is based on comps so the number you were given is likely close to true value. Since your growth is very recent with more expected to come I would wait, if you really believe it will materialize, and sell later. The larger future is speculative at this point to other buyers and it is a small business unlikely to attract interest of larger buyers. The employee is likely the best able to judge whether this growth will materialize or not so its likely if you did sell now you might get more than the comp based valuation would suggest since the employee would take it into account.

It sounds like the employee views themselves as creating part of the value so if you decide to keep the business and the employee is critical you really should find a way to cut them into the business through a way to earn/buy equity if certain targets are met. Potential equity can be very motivating and is used extensively elsewhere. I don’t agree with the 0 or 100% for people who create value. I do agree if they’re just another employee. If you don’t sell and don’t find a way for them earn equity you’ll lose them or they might find ways to impede your growth either inside or by launching a (well funded given access to funds) competitor. Since the key employee is the most natural buyer of the firm, if you decide to not sell the firm now but wait for the growth to materialize then you need a way to keep this employee onboard until that time.

smitcat
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Re: Should we sell our business?

Post by smitcat » Sat Jul 14, 2018 8:08 am

Rick Ferri wrote:
Fri Jul 13, 2018 8:52 pm
2016 wrote:
Fri Jul 13, 2018 8:32 pm
The current value according to the bean counting investment bankers is $900k. This calculation didn't include revenue from our new locations in other parts of the US....I priced in expansion and additional locations when the valuation didn't include those (yet).
Unless the bean counters are working for the buyer, you should not dismiss the $900 k. It’s likely closer to fair value than you want to admit.

That being said, you’re certainly entitled to negotiate with the buyer for a higher price based on any new increase in revenue from the other locations. However, $1.1 mm higher in two months is a little optimistic, IMO.

Based only on what you wrote in this thread, and if you want to continue working, your best investment is to continue with the business, IMO.
I concur with Rick - the value will be based upon the last 3 years growth and cash flow weighted towards the recent history.
In order for most folks to buy a business (even with good cash flow) they will need to take an SBA backed loan.
That in turn will be maxed out at 90% (or even 89%) of the business valuation.
90% of $900K is 810 leaving a wide gap of aboit $1.2 million for purhase plus operating cash, fees, legal etc.

I know few buyers able to drop $1.3 plus million for a purchase so then you start to talk about owners takling on a note.
At that point you are not truely out and have other decisions to make about how you value that transaction.
Good luck with whatever you choose.

Theseus
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Re: Should we sell our business?

Post by Theseus » Sat Jul 14, 2018 8:23 am

Having sold my business last year and retired I have a few points to make.

1. You don't seem to have been burned out by "work". So there is no reason to take less than $2 Million (if you think that's the right number) even if people suggest that $2 Million is not a fair value. The worst case is that you will be making $300k for next 5-7 years and may exit at a higher valuation.

It is flawed to just look only at the current situation and the past cash flow - that is like buying a mutual fund based on the past performance alone. Look up Net Present Value based valuation (google NPV Business Valuation) or Discounted Cash Flow based valuation. The future cashflow has to be included in the valuation in some capacity.

2. In my experience the growing business will fetch higher valuation. So I would wait a 12-18 months. That will give a nice growth trajectory in your projections that is backed up by some realistic numbers.

3. While I understand your desire to be 100% or 0% owner that may not give you highest valuation possible. Would this employee (and you) consider buying in over a time period of say 3 years? He buys specific % (say 25%, 25%, 50%) with an annual valuation based on specific targets your business reaches. This makes it fair to both you and him. I am sure you can even have a buyback clause with specifics - in case you think it is not going in the right direction (or he wants out).

Good luck. And if you sell, just know that the "retirement" at an earlier age when you can be physically active is a lot more fun than you can imagine :)

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Wildebeest
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Re: Should we sell our business?

Post by Wildebeest » Sat Jul 14, 2018 8:52 am

My vote: If you have a good offer go with it.

We sold our business. I did not want to. The business was growing like run away train. However strife with partners forced the sale.

Looking back we were fortunate to sell at the time we did before the 2008 crash. 10 years later the business has been sold again and is on life support.
The Golden Rule: One should treat others as one would like others to treat oneself.

gips
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Re: Should we sell our business?

Post by gips » Sat Jul 14, 2018 12:16 pm

we started a business with the idea that we'd sell once it hit our target sale price. After four years it was clear, given our backlog and recent deals, that we'd grow 40% year five and hit target valuation by the end of year five. We hired a respected investment banking company, they told us all offers would be based on year four ebidta, no matter how good it looked for year five.

So we put the sale on hold, made our growth numbers and sold at the end of year five. If you're confident of reaching your growth targets, why wouldn't you take the same approach since you're getting a multiple (sounds like 5x) of ebidta?

Another way to approach the sale is to create an earn-out agreement with the new owner. He pays a base amount, you work an agreed upon number of years and receive an additional payout based on growth/profits. We spoke to founders that did very well with earn-out agreements...better than if they'd sold the company for a fixed price. In our case, we had some client-concentration risk that we weren't willing to ride into an earn-out period.

good luck with it!

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unclescrooge
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Re: Should we sell our business?

Post by unclescrooge » Sat Jul 14, 2018 12:22 pm

2016 wrote:
Fri Jul 13, 2018 7:20 pm
il0kin wrote:
Fri Jul 13, 2018 6:49 pm
Assuming it went through tomorrow, 3.8M in liquid assets and 700k in real estate in your late 40's for a total NW of 4.5M? Yup, sounds like a dream come true to me. Bird in the hand is worth two in the bush. Sell it and enjoy your early retirement.
That does sound great. But at the same time, building it up and selling for 5X that in 7-10 years sounds even awesome-er-er. We're pretty cautious, and it may be tough to turn down such an offer. Would we have regrets? Possibly.
Kate Spade sold her name-branded business for $100 million. Life changing money!

Not ten years later it was sold again for $1 billion. Now she feels like a failure, and it's speculated that the depression resulted in her suicide.

If you sold something that you know is going to be worth 3x or 4x more in a few years, would that make you unhappy?

randomguy
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Re: Should we sell our business?

Post by randomguy » Sat Jul 14, 2018 12:47 pm

2016 wrote:
Fri Jul 13, 2018 9:02 pm
Rick Ferri wrote:
Fri Jul 13, 2018 8:52 pm
2016 wrote:
Fri Jul 13, 2018 8:32 pm
The current value according to the bean counting investment bankers is $900k. This calculation didn't include revenue from our new locations in other parts of the US....I priced in expansion and additional locations when the valuation didn't include those (yet).
Unless the bean counters are working for the buyer, you should not dismiss the $900 k. It’s likely closer to fair value than you want to admit.

That being said, you’re certainly entitled to negotiate with the buyer for a higher price based on any new increase in revenue from the other locations. However, $1.1 mm higher in two months is a little optimistic, IMO.

Based only on what you wrote in this thread, and if you want to continue working, your best investment is to continue with the business, IMO.
You are always the voice of reason. I hate that. :-) We are in a position of power in this transaction. We're fine continuing as owners. We're also fine selling at the price we think is reasonable (the "walkaway" price). If they don't take it, that's okay. If they take it, we feel good about it. I do think it's a bit premature to sell the business. In fact, we did a 20 slide PowerPoint deck telling him why we don't want to sell until 5-7 years from now. He countered that, saying basically: "Why should I continue working to expand and grow this company when I'm just increasing the cost of buying it in 7 years?" Seems like a valid argument. Truth be told. In 7 years, we'll put it up for sale, and we'll take the highest offer.

Well he works for you because you write him a check every month. He might decide he needs more money to show up on monday:)

If you need 2 million to retire but are only offered 900k, it doesn't matter if the deal is fair or not. It doesn't meet your needs. Making another 1.5 million over the next 5 years and selling for 600k, might. Or maybe selling for 900k and working for someone else for 5 years would make you happy.


il0kin wrote:
Fri Jul 13, 2018 6:49 pm
Assuming it went through tomorrow, 3.8M in liquid assets and 700k in real estate in your late 40's for a total NW of 4.5M? Yup, sounds like a dream come true to me. Bird in the hand is worth two in the bush. Sell it and enjoy your early retirement.
He would pay 25-45% tax on the sale most likely. Call it 1.2 million net. 3 million is still a lot of cash but not a ton for a person who had a 300k/year income. OP needs to know there number which may or may not be around 3-4 million.

jerkstore
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Re: Should we sell our business?

Post by jerkstore » Sat Jul 14, 2018 4:06 pm

Theseus wrote:
Sat Jul 14, 2018 8:23 am
Having sold my business last year and retired I have a few points to make.

1. You don't seem to have been burned out by "work". So there is no reason to take less than $2 Million (if you think that's the right number) even if people suggest that $2 Million is not a fair value. The worst case is that you will be making $300k for next 5-7 years and may exit at a higher valuation.

It is flawed to just look only at the current situation and the past cash flow - that is like buying a mutual fund based on the past performance alone. Look up Net Present Value based valuation (google NPV Business Valuation) or Discounted Cash Flow based valuation. The future cashflow has to be included in the valuation in some capacity.

...
+1 in bold

Given the same circumstances I would not sell it for less than $2mm. Anyone that approaches a company that is not for sale, should expect to pay above market value. Just like Zillow's "make me move" feature. "The house isn't for sale, but yeah I'd sell it for xyz." Those prices are always above FMV. The buyer here knows the future has upside...that's why they want in. You weren't looking to sell. The only rational response is the one you have "Yes I would sell for $$$ amount." Otherwise the upside/risk is yours. Don't sell your future on the cheap.

I was approached by one of my largest customers recently about them acquiring my company...I told them I'm not looking to sell, but at a price I would be willing to engage with them...they are meeting next month to discuss with their board.

On the other hand, if you're looking to sell then you take your company to market - and you should expect FMV offers.

mgensler
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Re: Should we sell our business?

Post by mgensler » Sat Jul 14, 2018 4:36 pm

I would ask to see a verified personal financial statement from the employee and their spouse. I would not do anything or get my hopes up until you receive this from them. Chances are they are not your buyer.

Whomever did your valuation should have given you a range of sales price. Low, median, high. You might be able to find comps possibly for your type of business.

When we sold our business, we targeted average of last 3 years ebitda and then a multiple range. A CPA should be Able to help you through all of this.

Cruise
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Re: Should we sell our business?

Post by Cruise » Sat Jul 14, 2018 4:37 pm

OP:

-Do you have any reason to believe that your employee/potential buyer will walk out the door if refused equity ownership and then open up a competing business?

-Have you and the potential buyer talked a price? Does he know about your $900k valuation and $2M aspiration?

-What percent of your valuation is attributable to Goodwill vs. Tangible Assets? They are taxed at different rates.

-BTW, the person I sold my business wanted to go into a sharing arrangement, but I refused that offer. I ended up partially financing the buy, but the interest rate I charged was much higher than prevailing rates. This motivated the seller to find conventional financing after showing a nice profit, and paying me off much earlier than projected.

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Horton
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Re: Should we sell our business?

Post by Horton » Sat Jul 14, 2018 4:39 pm

Not sure if it is useful or not, but this article includes a chart that shows median earnings multiples paid for small businesses. At $300K earnings, a $2M sell price would generate a multiple in excess of those shown. Sounds like that may be due to growth expectations. That said, the $900K business value assigned by the investment bankers would be more aligned to the multiples shown.

To be clear, I'm not saying you should base the value of your business solely on earnings multiples, but hopefully it provides some perspective.

Wricha
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Re: Should we sell our business?

Post by Wricha » Sat Jul 14, 2018 5:15 pm

Bfwolf wrote:
Sat Jul 14, 2018 12:16 am
I tend to agree with Rick that $2M sounds optimistic if you just had bankers say it's worth $900K. Do you have any indication that the buyer would pay $2M?

I think the concept of "enough" is important here too. More money is nice, but when you have enough, you have enough, right?
Wow this is moral issue? A bank valuation now is our moral compass? An valuation is simply a one person’s option nothing more. Negotiating a price higher then the valuation is absolutely fine. If your number is $2M that’s fine it is not about greed/enough it’s about what you are willing to sell it for. If the person is a willing buyer. Shake hands and call it day. How do you know, this person may have a idea to make it worth $20M in year. You should sell at the appraised value is just silly.

megabad
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Re: Should we sell our business?

Post by megabad » Sat Jul 14, 2018 5:56 pm

If your business does not primarily consist of real property (real estate, patents, product, etc) and you have an interested buyer, than I would sell given your proximity to retirement. Businesses like this are notoriously difficult to sell efficiently (unless you go the IPO route). If the business is something simple that is easily valued (ie. franchise restaurant/store) than I would hold out for a while unless the offer is incredible. Honestly with your portfolio assuming you are older, if I wanted to retire, I would likely even take $900k and be done with work, but that is a personal decision.

Bfwolf
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Re: Should we sell our business?

Post by Bfwolf » Sat Jul 14, 2018 7:21 pm

Wricha wrote:
Sat Jul 14, 2018 5:15 pm
Bfwolf wrote:
Sat Jul 14, 2018 12:16 am
I tend to agree with Rick that $2M sounds optimistic if you just had bankers say it's worth $900K. Do you have any indication that the buyer would pay $2M?

I think the concept of "enough" is important here too. More money is nice, but when you have enough, you have enough, right?
Wow this is moral issue? A bank valuation now is our moral compass? An valuation is simply a one person’s option nothing more. Negotiating a price higher then the valuation is absolutely fine. If your number is $2M that’s fine it is not about greed/enough it’s about what you are willing to sell it for. If the person is a willing buyer. Shake hands and call it day. How do you know, this person may have a idea to make it worth $20M in year. You should sell at the appraised value is just silly.
It's not a moral issue. The concept of "enough" is about getting out with enough to fund their retirement vs taking risk of not having enough or wasting good years of one's life in the hopes of having more than enough.

Wricha
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Re: Should we sell our business?

Post by Wricha » Sat Jul 14, 2018 10:06 pm

Bfwolf wrote:
Sat Jul 14, 2018 7:21 pm
Wricha wrote:
Sat Jul 14, 2018 5:15 pm
Bfwolf wrote:
Sat Jul 14, 2018 12:16 am
I tend to agree with Rick that $2M sounds optimistic if you just had bankers say it's worth $900K. Do you have any indication that the buyer would pay $2M?

I think the concept of "enough" is important here too. More money is nice, but when you have enough, you have enough, right?
Wow this is moral issue? A bank valuation now is our moral compass? An valuation is simply a one person’s option nothing more. Negotiating a price higher then the valuation is absolutely fine. If your number is $2M that’s fine it is not about greed/enough it’s about what you are willing to sell it for. If the person is a willing buyer. Shake hands and call it day. How do you know, this person may have a idea to make it worth $20M in year. You should sell at the appraised value is just silly.
It's not a moral issue. The concept of "enough" is about getting out with enough to fund their retirement vs taking risk of not having enough or wasting good years of one's life in the hopes of having more than enough.
I read that their walk away was 2M

riverguy
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Re: Should we sell our business?

Post by riverguy » Sun Jul 15, 2018 12:11 pm

Paying 7x cashflow for a small business would be pretty crazy.

123
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Re: Should we sell our business?

Post by 123 » Sun Jul 15, 2018 12:30 pm

Local, national, and global changes in economic conditions can drastically effect the value of a buisness. Things seem to be a roll right now. Maybe it's a good time to get out while the getting is good.
The closest helping hand is at the end of your own arm.

randomguy
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Re: Should we sell our business?

Post by randomguy » Sun Jul 15, 2018 12:55 pm

riverguy wrote:
Sun Jul 15, 2018 12:11 pm
Paying 7x cashflow for a small business would be pretty crazy.
Depends on the business. Some Saas company with locked in customers, 30% yoy growth for the past 5 years, and no owner value is a lot different than buying some gym that has been doing the same sales for the past 10 years. OP is trying to sell a story (we will grow to 1 million in profits in 7 years) which is a bit different than lot of small business which are more buy a job (i.e. when you sell medical practices).

As far as the bird in hand, we are talking 3 years of work. If you want to but in the time, you aren't taking a big risk by not selling. It might be very hard to find a buyer in 5-7 years but odds are you will make more than you will by selling now even if you just shutter the business. Of course you do have to work those years.

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Re: Should we sell our business?

Post by Dottie57 » Sun Jul 15, 2018 12:57 pm

riverguy wrote:
Sun Jul 15, 2018 12:11 pm
Paying 7x cashflow for a small business would be pretty crazy.
I think so too.

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Re: Should we sell our business?

Post by Dottie57 » Sun Jul 15, 2018 1:39 pm

Wricha wrote:
Sat Jul 14, 2018 5:15 pm
Bfwolf wrote:
Sat Jul 14, 2018 12:16 am
I tend to agree with Rick that $2M sounds optimistic if you just had bankers say it's worth $900K. Do you have any indication that the buyer would pay $2M?

I think the concept of "enough" is important here too. More money is nice, but when you have enough, you have enough, right?
Wow this is moral issue? A bank valuation now is our moral compass? An valuation is simply a one person’s option nothing more. Negotiating a price higher then the valuation is absolutely fine. If your number is $2M that’s fine it is not about greed/enough it’s about what you are willing to sell it for. If the person is a willing buyer. Shake hands and call it day. How do you know, this person may have a idea to make it worth $20M in year. You should sell at the appraised value is just silly.
I did not think that the answer was about morality.

The biggest point about the purchase price is that It is likely too much over the valuation to get an SBA loan to cover the price. Likely that op should keep the business and work at the “hope” of better standard valuations. I don’t think a buyer will want to buy hope.

nasrullah
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Re: Should we sell our business?

Post by nasrullah » Sun Jul 15, 2018 1:54 pm

There are so many red flags I don't know where to start.
2016 wrote:
Fri Jul 13, 2018 6:44 pm
We’re a married couple in our late 40s with a teenager. We have $1.8M invested and have $700k in real estate (includes primary residence). Together we own and operate a business with profits of around $300k a year.
I'm assuming this includes your compensation?
2016 wrote:
Fri Jul 13, 2018 6:44 pm

In the last two years, we’ve found a way to rapidly expand the business and increase revenues. Based on the first 10 years of our business, we predict that in 5-7 years, our profits may approach a million a year (of course, no guarantees).
Growth is fantastic! For most companies sustaining double digit growth year over year is tricky. Growing 300% in 5-7 years would be amazing.
2016 wrote:
Fri Jul 13, 2018 6:44 pm

A key employee approached us a few months ago and expressed interest in becoming a co-owner, or an outright owner. His spouse is a doctor and they have significant cash flow available.
Significant cash, or significant cash flow?
2016 wrote:
Fri Jul 13, 2018 6:44 pm

We were planning on retiring in 7 years. But now, we may have the option to sell this business to him. We would work during a short transition period and then be completely out of the business. That sounds like a possibly good exit strategy. What would we do next? We don’t know, but we would enjoy figuring that out.
Why did you invest to expand the business if you are planning on retiring in such a short horizon? I have never seen a near retirement plan advocate for increasing spending, it's always the opposite.
2016 wrote:
Fri Jul 13, 2018 6:44 pm

Because our expansion in the last 2 years has hurt our cash flow, the current valuation of the business is around $900k.
3x on net profit is low even for a cash flow business. But if you are only being valued on this number and really want to sell now you probably already know what to do: cut expansion, fire employees, improve cash flow, increase business value, sell.
2016 wrote:
Fri Jul 13, 2018 6:44 pm

We believe the true value of the business to be much higher. Every business owner probably believes their business is worth more than market value, I would imagine. Our “walkaway price” is $2.0M. If he gives us that amount, we feel that’s a fair value of the company.
Sounds like you know your number. You just need to find someone willing to make an emotional purchase on potential value, or get your numbers to support it.
2016 wrote:
Fri Jul 13, 2018 6:44 pm

He’s concerned that if we wait to sell it to him in 7 years, the price will be unattainable for him.
So what, this is like saying I want to buy your house for less than you want to sell it for, and you need to sell it to me today because I can't afford it now or what it will be worth in a year. This has zero impact on your decision to sell, and the price that you are selling for.
2016 wrote:
Fri Jul 13, 2018 6:44 pm

He feels that if he’s helping us grow this business year after year, he should be a partner with us. I don’t disagree, but we don’t want partners. We want to be 100% owners, and then 0% owners.
Big red flag. He's not a partner, he's an employee. He is working for you in exchange for compensation. If equity in your business is not on the table it's not. There are multiple forms of compensation, and lots of options for you to provide an appropriate market rate. If you don't want to give equity that's perfectly reasonable.
2016 wrote:
Fri Jul 13, 2018 6:44 pm

Questions:
Would you walk away from a thriving business for $2M, when chances are pretty good, it’ll be worth much more than that in 5-7 years?
$2.0M is your walk away number, depending on the type of business 4-5x would be the maximum you could expect to receive. With a present value maybe $1.2M I would absolutely take $2.0M to sell.
2016 wrote:
Fri Jul 13, 2018 6:44 pm

What price would it be worth to you to walk away from this?
Do you want to continue building the business or do you want to sell it. If you want to sell it, then sell it for what it's worth today. If you want to build it and go for something larger keep going. If you want to sell it for $2.0M and are seeing 4x your net profit in valuation you need to add $200K to your bottom line in a combination of growth and expense management.
2016 wrote:
Fri Jul 13, 2018 6:44 pm

Would you risk losing a good employee by not offering part ownership? We’ll discuss profit sharing with him if we don’t sell.
Yes, frankly everyone is replaceable. Not knowing your business I couldn't say if I would go the profit sharing or commission route. You should consider the impact a disgruntled employee would have on your business, customers and other employees so planning for an alternative may be prudent.
"We have a lot to do, and very little time, so we must work slowly." Liviu Ciulei | | Thanks vineviz (https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=134698) for the quote.

Wricha
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Re: Should we sell our business?

Post by Wricha » Sun Jul 15, 2018 6:51 pm

Dottie57 wrote:
Sun Jul 15, 2018 1:39 pm
Wricha wrote:
Sat Jul 14, 2018 5:15 pm
Bfwolf wrote:
Sat Jul 14, 2018 12:16 am
I tend to agree with Rick that $2M sounds optimistic if you just had bankers say it's worth $900K. Do you have any indication that the buyer would pay $2M?

I think the concept of "enough" is important here too. More money is nice, but when you have enough, you have enough, right?
Wow this is moral issue? A bank valuation now is our moral compass? An valuation is simply a one person’s option nothing more. Negotiating a price higher then the valuation is absolutely fine. If your number is $2M that’s fine it is not about greed/enough it’s about what you are willing to sell it for. If the person is a willing buyer. Shake hands and call it day. How do you know, this person may have a idea to make it worth $20M in year. You should sell at the appraised value is just silly.
Maybe the buyer knows something the seller does not. I did not see anything on financing.
I did not think that the answer was about morality.

The biggest point about the purchase price is that It is likely too much over the valuation to get an SBA loan to cover the price. Likely that op should keep the business and work at the “hope” of better standard valuations. I don’t think a buyer will want to buy hope.

Wricha
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Re: Should we sell our business?

Post by Wricha » Sun Jul 15, 2018 6:54 pm

Wricha wrote:
Sun Jul 15, 2018 6:51 pm
Dottie57 wrote:
Sun Jul 15, 2018 1:39 pm
Wricha wrote:
Sat Jul 14, 2018 5:15 pm
Bfwolf wrote:
Sat Jul 14, 2018 12:16 am
I tend to agree with Rick that $2M sounds optimistic if you just had bankers say it's worth $900K. Do you have any indication that the buyer would pay $2M?

I think the concept of "enough" is important here too. More money is nice, but when you have enough, you have enough, right?
Wow this is moral issue? A bank valuation now is our moral compass? An valuation is simply a one person’s option nothing more. Negotiating a price higher then the valuation is absolutely fine. If your number is $2M that’s fine it is not about greed/enough it’s about what you are willing to sell it for. If the person is a willing buyer. Shake hands and call it day. How do you know, this person may have a idea to make it worth $20M in year. You should sell at the appraised value is just silly.
Maybe the buyer knows something the seller does not. I did not see anything on financing.
I did not think that the answer was about morality.

The biggest point about the purchase price is that It is likely too much over the valuation to get an SBA loan to cover the price. Likely that op should keep the business and work at the “hope” of better standard valuations. I don’t think a buyer will want to buy hope.
Maybe the buyer knows something the seller does not. I did not see anything on financing.

cop
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Re: Should we sell our business?

Post by cop » Sun Jul 15, 2018 7:09 pm

If you end up offering the potential buyer profit sharing, I would seriously consider making at least the same offer to M. Is the salary she has negotiated with you where you feel she deserves to be. Many people have a problem negotiating on their own behalf but get upset if/when they find that they are getting less than someone else.

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David Jay
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Re: Should we sell our business?

Post by David Jay » Sun Jul 15, 2018 8:05 pm

2016 wrote:
Fri Jul 13, 2018 6:44 pm
We want to be 100% owners, and then 0% owners.
As long as you hold the majority stake, I would consider selling a stake to your employee (I would never recommend that he purchase a minority stake, but that is his choice).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

gutrageous
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Re: Should we sell our business?

Post by gutrageous » Sun Jul 15, 2018 8:35 pm

Way to many variables to answer a “sell or don’t sell” question. You seem to be torn and still dealing in absolutes ie “100% or 0% ownership”.

While I don’t necessarily disagree with not wanting to have a minority interest in a small company, what if you balanced that with the option of having that interest vs having a note back to the buyer?

Certainly not proposing taking it all in the form of a note but what about taking 1mm cash and then 1mm in a convertible note? Yep, there’s risk taking the note but you are getting some cash in hand and also the option to participate in any upside.

There are just so many moving parts and thinking in terms of either\or seems like a mistake.

MJW
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Re: Should we sell our business?

Post by MJW » Sun Jul 15, 2018 9:19 pm

OP - prior to the employee's offer to buy, did you and your spouse have a plan for how you will exit the business?

Also, I'm a little confused about this employee's contribution to the success of your business. The employee believes that he deserves a bigger piece of the pie for helping you grow the business, yet you described it as "no big deal" if he walked and stated that he could be easily replaced. So did he make unique, game-changing contributions from an intellectual/creative/sweat equity standpoint, or is he a cog in the wheel that just so happened to be the warm body filling that role? He clearly sees himself in the former and is using that as leverage in his conversations with you.

There are so many unknowns here, but based only on what I'm taking away from this thread I would be inclined to agree with Rick and proceed as you were.

2016
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Re: Should we sell our business?

Post by 2016 » Mon Jul 16, 2018 7:26 am

Thanks for all of the awesome advice. It’s really been helping us figure this out, as we’ve never done something like this before. We’ve been reading with great interest everyone’s take on this issue.

To answer some of the recurring questions: We really aren’t that interested in what last year’s cash flow was, in terms of valuing the business. We’re looking at the first half of 2018, and into 2019 to determine the true value. Organic growth in 2018 ytd is about 20% increase over 2017. New business due to expansion into new markets has added about 25%. This new business revenue should increase quickly. Our bottleneck is hiring qualified individuals.

Also, we’re not motivated sellers (yet), so I do think this is kind of like that real estate “Zillow - Make me an offer to move” price that you can assign to your home. We were not planning to sell so soon, BUT, we would for this price. That you (or more importantly, the buyer) may not think it’s worth that or is even a 'crazy' valuation is fine. We’ll keep plugging away. I do look forward to updating this thread periodically to give updates. We’ll all be able to “time travel” together to see how this plays out, and if we were wildly optimistic on the future of this business or were realistically optimistic.

About this key employee: We have a non-compete clause in his contract. Those can be tough to litigate and win, but at least we have a 2-yr noncompete which may scare him from trying. We have the infrastructure and client base in place, and it would be difficult for him to recreate what we have. We have about 50 employees. We don’t view him leaving to start his own as a real threat. He’s competent, but we don’t have too much heart-burn with the idea of him leaving. He’s more of a solid implementer than a visionary. Certainly he’s much more than a “cog” or a “warm body”, but except for a possibly somewhat bumpy transition, I don’t even feel there would be a negative impact on total revenue if he left.

The 300k cash flow did not include our personal compensation. We’re W2 employees pulling in wages above and beyond the $300k.

My summary of how we’re feeling about this: Our plan is to keep expanding, keep growing, keep plugging away. If he meets our walk-away price, we’ll gladly sell it to him. If he doesn’t, that’s okay. Our long-term plan was to sell in 5-7 years to either a nationwide group that could afford this, or to employees who could afford it. And we've solidified our desire to go from 100% to 0% - no partners, no minority ownership, no ramping down.

Thanks again for your input. It's been invaluable.

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