Sell, Grow, or Take Capital? The Question Comes Before the Transaction

Speaker A: Sell, grow, or take capital. The question comes before the transaction. I've been talking with a business owner who's trying to figure out whether he should sell his company or keep growing it. And the more I listen to him, the more I think maybe that's the wrong question. Not because selling is wrong, uh, not because growing is right, but because he's already reduced a pretty consequential decision to two choices. Sell or don't sell. And business ownership doesn't actually work that way. This guy has built a real company. He's relatively young. He's not exhausted. He's not sitting there telling me, ed, get me the hell out of here. He'd stay involved. He thinks there's more opportunity in the business. But he's also reached that point where somebody could put a meaningful amount of money in front of him. And when that happens, everything gets real pretty quickly. Because now you're not talking theoretically about what your company might be worth someday. There's potentially a check. And a check has a funny way of turning a long term business question into an immediate transaction question. Do I take it? Do I keep going? And that's where I think owners have to be careful. Because the transaction somebody puts in front of you isn't necessarily the decision you actually need to make. I've changed the way I think about this quite a bit over the last couple of years. I got into M, M and A because I was looking at buying businesses myself. Then I started working around transactions, buyers and sellers, capital financing, all the stuff that happens when somebody decides a company is changing hands. But the more owners I've talked with, the more interested I've become in what happens before the transaction, because that's usually where the real decision is. I'm, um, meeting owners where the hell they are. And a lot of them aren't saying, ed, I want to sell my company. They're saying, I need money to grow. I want to buy another company. My partner and I aren't on the same page anymore. Somebody approached me about buying the business. I'm 62, and I don't want to work like this forever. My kids aren't taking this thing over. I'm 45 and I think I can double this business. I want some money off the table, but I don't want to retire. Those are completely different problems. So why would they all have the same answer? Take the owner who's deciding between selling and growing. Let's say he sells okay. How much does he actually walk away with? After taxes and transaction costs? Does he have to roll equity. Does he have an earn out? Does he have to stay for three years? Who controls the company during those three years? What does his life look like after the deal? And here's one people don't spend enough time thinking about what the hell is he going to do with the money. Because if you've spent 20 years getting really good at operating a company, spending, selling it and putting the proceeds into investments you don't understand particularly well isn't automatically a better financial decision. The number on the purchase agreement is only part of the equation. Now take the other side. Keep the company and grow it. Fine, what does that require? More working capital, more people, another location, better management, better systems, maybe an acquisition. And here's the big one. Does the owner actually want to do what's required to build the next version of the company? Because I don't want to sell isn't a growth strategy either. And then there's the territory between those two answers. That's the part I think gets interesting. What if you don't sell the whole company? What if you bring in capital? What if you recapitalize the business and take some chips off the table? What if you find a strategic partner who brings something besides money? What if instead of selling to the company, buying everybody in your industry, you acquire two smaller competitors yourself? What if you promote or hire somebody capable of running the day to day business and change your own role? There are, uh, trade offs to every one of those. Capital isn't free, partners aren't free, debt isn't free, giving up equity isn't free. And keeping 100% ownership of a company that requires 100% of your life isn't exactly free either. That's the analysis. Not should I sell? But what am I actually trying to accomplish? And that's why I've become somewhat obsessed with this idea of owner optionality. Not as some fancy finance term. I mean something really simple. Uh, how many good choices do you have? If you need a lender tomorrow, can somebody understand your financials? If an acquisition opportunity shows up next month, can you finance it? If somebody offers to invest in the company, do you understand what you're giving up? If you disappear for three weeks, does the company continue functioning? Um, if a buyer calls, can you evaluate the offer without panicking? If you decide you don't want to sell, can the business actually support the next stage of growth? That's optionality. And you build most of it before you need it. There's another question I've started liking. When I look at a business what happens Monday morning if the owner doesn't show up? Uh, not forever, just Monday. Who opens the place? Who makes the decisions? Who talks to the important customers? Who knows what's happening with cash? Who approves the work? Who solves the problem when something goes sideways? If the answer to every one of those questions is the owner, we've learned something important. And I'm not just talking about valuation. We've learned something about the owner's freedom. Because owner dependency doesn't only cost you when you sell. It costs you while you still own the company. It limits your ability to buy something else. It limits your ability to step back. It limits the capital you can bring in. It limits who might partner with you. And eventually, yes, it can limit what somebody is willing to pay for the business. But. But waiting until six months before a sale to fix that is a little late. The same thing applies to financials. People talk about cleaning up the books before selling. Sure, but what if you don't want to sell? What if you want to borrow half a million dollars? What if you want to acquire another business? Uh, what if you need working capital? What if you want to bring in an investor? The lender doesn't finance the version of the business that exists in your head. Neither does an investor, neither does a buyer. You have to be able to show them what's actually there. Again, that's optionality. And then there's the transaction itself. This is something I've said a lot lately because I think owners need to hear it. Most business owners will do one major transaction in their lifetime. Everybody else around the table does this for a living. The buyer, the private equity firm, the lender, the attorneys, the accountants, the diligence people. They've seen working capital adjustments. They've seen EBITDA add backs. They've seen. They've seen earnouts, they've seen seller notes, they've seen rollover equity. They know where transactions get renegotiated. They know where risk hides the owner. The owner knows the company probably better than anybody else on earth. But those are two different kinds of knowledge. And that's why I don't think the owner should wait until there's a letter of intent sitting on the desk to start figuring all this stuff out. The work I'm increasingly interested in is the conversation before that. What does the owner want? What does the company need? What's standing in the way? What happens economically under each choice? What happens personally under each choice? And which decisions create more options instead of fewer. Then we can talk about the transaction and Maybe the answer is sell. Great. Maybe it's acquire. Maybe it's bring in capital. Maybe it's recapitalize. Maybe it's fix the business for two years and revisit the question. Or. Or maybe the smartest thing you can possibly do is keep the damn company. That's fine, too. Because the objective isn't to manufacture a transaction. Uh, the objective is to make a better decision. So if you're sitting there wondering whether you should sell your business, I'd start one step earlier. Don't ask, should I sell? Ask what am I actually trying to accomplish? And what choices do I need to preserve to get there? Because the transaction somebody's offering you and the decision you actually need to make aren't always the same thing. I'm Ed Weeks. This is Weeks weekly. Better Decisions for Business Owners.