We recently did an informal survey of some of our venture capital colleagues. We asked, "What crossroads decisions are most common and challenging for entrepreneurs in the course of the business-building journey?"
The most common responses to this open-ended question were whether to take an investment and whether to sell the company. For some the decision to take OPM (other people's money) is the beginning of having decided to sell. So it's a similar crossroads — involving a trade-off between control and value creation. It is, as Harvard Business School Professor Noam Wasserman has neatly dubbed it, the "Rich versus King" dilemma.
If founders end up at the crossroads of trying to decide whether to sell their business, one of the first things to realize is that this is one of those things that falls into the "high-class problem" category. With that said, here are questions and thoughts for a founder to ask/ponder to help determine whether it makes sense to sell:
1. Do you need to sell?
You can avoid this issue entirely by investing cannily in assets with long-term value and, thus, extremely long hold periods. Buy things with sound cash flow and — theoretically — "hold-forever" potential. A long-term-value-creating mindset tends to create fewer exit timing problems for investors than a short-term-value-capture mindset.
2. Are you trying to value-maximize too much? And even if you do, will it really matter?
The cliché says it best: hungry pigs may get fat, but greedy ones get slaughtered. Don't be the former. It makes no sense to lunge for every last nickel. Estimate the difference between what you are certain to get now versus some realistic best-case scenario of what you might get. Once you have done that, factor in the time value of your money. That is, estimate how much the money you get now will grow and compare that number to the amount you hope to get in your best-case scenario. Trying to perfectly time the peak is foolish.
3. Can you take some chips off the table while staying in the game?
As J.P. Morgan said once, "I made all my money by selling too early." Whether it's through a dividend, a recap, or a sale of part of your stock in a company, if you have a chance to realize some liquidity, take a long, serious look if that option makes sense.
4. What is the market context?
If lots of people are buying, it may be time to consider selling. Having lived through the dot.com boom and bust, one timeless lesson that remains is that if everyone is panting to get into something, it may be time to get out. Ask yourself if this is a buyer's or seller's market.
5. Do you really want to sell?
Ultimately, it is as much about what you personally want to do as it is about what dollar amount you might get. Will you be happy selling because you will be able to go on to a new venture? Or will you feel like you have "sold out" — that you not only could have done more with this business but that it is what you love doing? Are you confusing selling with wanting a different role? That is, do you want to get out of the day-to-day but still be an owner? If that is the case, then hire someone.
Separate your financial motivations for selling from the non-financial reasons and write them down or discuss them with a close adviser or mentor. It is hard to disaggregate the reasons, but doing so alongside answering each of these questions will help bring clarity to this crossroads.
Thanks to Anthony Tjan / Blogs HBR
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