Jan 2, 2023 | Financial Acceleration

I’m disappointed in the offer for my company. Should I take it?

Q. Dear Zenagos, I started a service business about five years ago. It was my first business, and I have an opportunity to sell it to a big company. After my investors get paid, I really won’t get that much, maybe a year’s salary. I really thought being an entrepreneur would help me build wealth, but I don’t see any better deals. Should I just cave and take the deal?
–Dom

Selling a business is actually pretty hard. Between 70% and 90% of company purchases fail (Christensen et. al., 2011). Unlike stock in a publicly traded company, equity in a private company doesn’t have a large and liquid market. Business buyers are very cautious because it is common to discover unpleasant surprises after the deal is done. On the other side, business sellers are often unrealistic about the value that their business commands, which kills many potential deals before they close. Bringing two sides together to actually close a business deal is truly challenging.

Any Exit is a Success
Selling your business for what the market will bear is not “caving” to pressure – it’s good business. If you had another buyer offering a higher price, then you would obviously take that offer, so right now you are taking the best offer that is on the table. Selling a business is a real accomplishment, and you should be proud, no matter what the price is.

From the experience of launching, building, and selling your own business, you will have learned a lot about what builds value, and you will take those lessons into the future. Many entrepreneurs find this cycle addictive; as soon as they have sold their business, they are busy thinking up the next one. Don’t discount the respect and credibility that you will get as an entrepreneur who has successfully sold a business. A successful exit will be real currency with investors when you start your next business. You will find that fundraising for subsequent ventures will be easier than it was for the first.

Investors Get Most of the Value
Because they are the ones putting their money at risk to start the business, the investors capture most (or even all) of the value when the business is sold. So, most entrepreneurs build their real wealth on their second or third business, not the first one. This is true in most industries. For example, new movie stars often don’t make much on their first movie. Sometimes it takes a few successful movies before actors build the reputation and wealth to produce their own films.

Next Time You May Control the Value
Having a successful exit under your belt, you will be able to negotiate for better terms for your next business, and you may be able to own most or even all of the equity. When you exit that business, you will win a larger piece of the pie.

Entrepreneurs often tell us that they are disappointed by the market value of their business. As a business owner, you put your heart and soul into the enterprise, and it is hard not to have big dreams for the wealth that it will provide for you. But don’t let that diminish your pride in your accomplishment. Selling a business – any business at any price – is a feather in your cap.

References

Christensen, C.M., Alton, R., Rising, C., & Waldeck, A. (2011). The new M&A playbook. Harvard Business Review, 89(3), 48–57.

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