Thread: So its finally done! Biz Sold!

Well folks I'm happy to say its finally done. For 3 years, I've been trying to sell my business and its been ONE LONG ORDEAL. In those 3 years, I've received multiple offers varying in range from $4 million to as high as $7 million. The buyer pool ran the gambit from people with rich relatives, to Silicon Valley Sand Hill Road VC's to small publicly traded companies, to private equity firms scattered throughout the country.

All accepted LOI's (Letters of Intent) resulted in LONG due diligence processes that took months of time, energy, and scrutiny. Instead of running and growing a business, I spent countless hours running data reports, financials, traffic metrics, doing interviews -- all sideline activities that lechered my time away from doing my core job -- growing a business.

On Friday the sale finally closed and I received 7 cashiers checks totaling millions of dollars -- this had the instant effect of doubling my liquid net worth - all in a matter of seconds. (Although the *process* certainly wasn't instant).

So like with all my stories, I like to post the learning process -- what things I've learned and what things you can take from my experience.

#1) Making big monthly cash flow doesn't equate to happiness. My reasons for selling my business was because the business WAS NOT ENJOYABLE anymore. Sure I was netting six-figures monthly, but the industry was no longer appealing to me. The thought of hiring, firing, and management was unappealing.

I am an entrepreneur - I build and create things. After the building and creating is DONE, I sell. Management, hiring, firing, CEO activities, etc does not appeal to me. Even though I removed myself from the company's daily hum-drum, it always existed for me mentally.

As far as I was concerned, I achieved all I wanted to achieve over 3 years ago. I felt I was Michael Jordan and trying to retire "at the top of my game" -- this is why the business went up for sale 3 years ago.

Unfortunately, the business didn't sell quick although it drew tons of interest. In the following 3 years trying to sell, I semi-retired. I didn't work very hard and started to ignore the business and live off the cash-flow.

#2) When you ignore your business, especially a technology business, (no matter how automated) its growth will stall and reverse. If you ignore something long enough, it will disappear. During my semi-retirement and zeal to sell for these 3 years, my business lost MILLIONS in valuation. Selling at the top wasn't as easy as "placing a stock order" or "putting the property in the MLS" .. selling a business is long process that takes months, sometimes years. My business is rather simple and it took 5 1/2 months. A complicated business can take a year or more.

In hindsight, ignoring your business is this diligence time frame really is a big risk.

#3) Its harder to sell businesses that are "Passengers in the Fastlane" vs "Drivers".

My difficulties in selling the business promptly was due to the source of my revenue stream. Although I was "driving in the fastlane", a small portion (20%) of my revenue stream was derived from a "super-affiliate" (which is being a "passenger in the fastlane".) A super-affiliate is someone who sells your product/service and does so at a super pace. This meant, if the super-affiliate quit, my revenue would be impacted by 20%. This scared potential buyers as I did not control 100% of my revenue stream. This also meant that any sale would have to include this super-affiliate as a lynch-pin in the deal. It gave someone with ZERO ownership in my business, a certain level of power. Very frustrating.

At some point in the future, I will elaborate on this "Passenger" vs "Driver" in the fastlane concept. If you manufacturer a product and Walmart is your only customer, you are a "passenger in the fastlane" -- Walmart dictates your revenue stream and their business decisions will hold your company hostage. Being a "passenger in the fastlane" can be very lucrative -- but its risky and affords you as an owner, little control giving you the illusion that "I am the boss".

#4) Revenue is almost as important as profitability.

Another difficulty I faced is that my company was operating on very high margins - it was very profitable when correlated to revenue.

Which company do you think is worth more?

Company A:
Revenue: $30,000,000
Profit: $1,000,000

Company B:
Revenue: $3,000,000
Profit: $1,500,000

In general, Company A is worth more despite it making LESS. If my company operated under a different revenue model which resulted in higher revenues, yet, experienced the same profitability, it would have been worth 5X more.

#5) What is said vs written are two different things.

Whatever is negotiated in person and verbally is irrelevant. The matters is the legal document that describes what was discussed. If there is a dispute on terms, no one will care, including a judge, what was said at Starbucks or Applebees over coffee -- what matters is the legal terms written in the documents. Be very careful with these documents and ensure they are reviewed by a competent attorney. Hidden language can sweep your rights underneath a rug.

I remember I agreed with a potential buyer on a 30 day provision. When the document came, it said "30 business days" which translates into 45 days, not 30 days. This is how these documents can be tricky. If my attorney (or me) didn't spot this ONE WORD "business", it legally altered a verbal deal.

So whats next for me? I'm taking a mental break and will continue to write. I still have to work with the new owners in transitioning the business and assist them to get it to the next level. I'm excited to have sold - but I'm also excited for the new owners (An investor group consisting of angels and private equity). After a month or so under new ownership, I will probably buy back into my business as an equity investor.

MJ

PS: I will disclose the business once the company is transitioned and my confidentially period expires.

Congrats on closing the deal!!

Originally Posted by PhxMJ

#1) Making big monthly cash flow doesn't equate to happiness.

I am an entrepreneur - I build and create things. After the building and creating is DONE, I sell. Management, hiring, firing, CEO activities, etc does not appeal to me. Even though I removed myself from the company's daily hum-drum, it always existed for me mentally.

Congratulations on the sale! And thank you for the great lessons you've posted.

I think this one is particularly brilliant because you recognized something about yourself. Russ H. and I were talking about this very thing yesterday. There are so many entrepreneurs that start a business and then self-sabotage just so they can create again.

Typically the person who creates is not passionate about the systems. Know your strengths and your passions, and be true to them.

Originally Posted by PhxMJ

#2) When you ignore your business, especially a technology business, (no matter how automated) its growth will stall and reverse.

Oh, man, I'm giving you rep++ just based on this one. It is SO TRUE. I took my eyes off my company, Tax Loopholes, to work on a start-up and to clear my over-committed writing projects. (I was a little too flattered when McGraw Hill and Wiley got in a bidding war...and overcommitted. NEVER again.) I'm back to my main company, Tax Loopholes, revenue has jumped and I'm much much happier.

Keep your eyes on the prize.

Originally Posted by PhxMJ

#4) Revenue is almost MORE important than profitability.

Interesting MJ. I have to think about this one. This is new to me and I LOVE learning new things.

Originally Posted by PhxMJ

#5) What is said vs written are two different things.

Amen! We say a verbal agreement is worth the paper it's written on - ie NOTHING. Even if all parties are completely honorable (which who knows in a new relationship if that's true or not), you still might think you agree, but you really don't. Get it in writing.

congratulations!

Congrats MJ on the sale.. Im looking forward to learning more details on how you prepared(or unprepared) the biz for sale.

Congrats and thanks for your insight on your experience. Looking forward to hearing more.

Greg

I almost forgot ... one HUGE critical factor in my desire to sell.

#6) Cash NOW > Cash LATER
When you build a business from nothing (well, I bought this business for $250K) and then sell it -- the lump sum gains are taxed at long term capital gains of 15%. (Assuming you don't get hit with AMT)

So from a financial perspective, selling a business for 1, large lump sum pays extra dividends as the sale from the gain is taxed at only 15%, PLUS you get money now vs money later. Due to the present value of money, $10mm now is always better than $10mm received over the course of 5 years.

Cash flow from the business was being taxed at 40%. Almost half of my business profits were going to the government.

So hypothetically, if you own a business that cash flows $100K/mo, you will be taxed at 40% on that income (35% Fed, 5% State). At these tax rates, cash accumulation is slowed. Drop in the present and future value of cash, the decision to sell was a no-brainer.

When you sell a business, the lump sum is acquired INSTANTLY and taxed at only 15%. Its a total acceleration of net worth, both in terms of taxes (less taxes) and present value calculations (Cash NOW > Cash LATER).

So the concept here is the acceleration of your net worth in the form of getting 1) CASH NOW and 2) TAXED LESS -- I could have held the business and continued to cash-flow while enduring high tax rates OR I could sell the business and experience an acceleration of net worth, at the price of less taxes and more time.

Compare these hypothetical situations ....

Sell business for $6,000,000

Advantage
1) Sale is taxed at 15% long-term capital gains vs 40%.
2) Acceleration of net worth - money received NOW vs over the course of 3-6 years.
3) Gain of time, our most precious asset -- don't have wait to accumulate cash via cash flow.

Disadvantage
1) Loss of business appreciation (could have grown business by another 50%)
2) Loss of cash-flow

Keep business, reap cash flow

Advantage
1) Monthly cash-flow
2) Focus on business growth for a future sale

Disadvantage
1) Cash-flow taxed at 40%
2) Slow accumulation, money later is not as good as money now
3) Cash-flow not guaranteed as business environment can change.

The point is this: Building a business, growing it, and selling it is FASTLANE. You accelerate your net worth by three aspects: 1) Building a business grows your net worth by its valuation 2) You pay less taxes on the sale and 3) You get money now (sale proceeds) vs money later (business cash-flow)

Now after I take a break from book writing, vacationing, doing whatever, I will turn around and do the same thing. Build something from nothing, grow it, and sell it. The start-up mode is what gets my adrenaline moving!

PHXMJ - Congrats!! Thanks for sharing..............
Kevin

Congrats MJ!

I don't quite understand what you were trying to say with #4 though.

Originally Posted by Yankees338

Congrats MJ!

I don't quite understand what you were trying to say with #4 though.

When valuating businesses, top-line revenue is as important as profitability. It may pay to increase revenue at the expense of profitability. In my case, I would have been better served to increase revenue $2MM at the expense of $500K in profits.

If my company had $30 million in revenues instead of $5 million, yet earned 1/2 of what it earned, I could have sold to the first buyer at my door and for more money. Of course, this is not a hard-n-fast rule (very industry dependent) but its something to think about.

Originally Posted by PhxMJ

When valuating businesses, top-line revenue is as important as profitability. It may pay to increase revenue at the expense of profitability. In my case, I would have been better served to increase revenue $2MM at the expense of $500K in profits.

If my company had $30 million in revenues instead of $5 million, yet earned 1/2 of what it earned, I could have sold to the first buyer at my door and for more money. Of course, this is not a hard-n-fast rule (very industry dependent) but its something to think about.

Is this because the potential buyer views higher revenue as an easier avenue to increase profits? Ex. Cut cost by 10% = 3mm per year increase.

MJ, Im new to this site but a long time member on some of the car, watch sites on the net. Lambo-power being one of them. I wanted to congratulate you on the sale of your business. I also hope to read and learn a lot that I didn't learn in college.

So far I love some of the posters and threads on the site!

Congratulations, MJ, I am very happy for you.

And the insights are invaluable, I (we) are learning a lot from them, thank you

Congrats on the sale, it sounds like the company was a beast to run. I would have sold it too

I know what you mean about the time, seems a lot of 'bigger' companies take forever and a day to do anything.

What are your plans now? Do you intend to start a new company and sell it again or just invest what cash you have now and play around with the investments?

Outstanding!

It is nice to see that good guys do actually win.

Thanks for sharing so much with us.

Congrats!!!
Rep++ for sharing.
I hope your confid period expires soon.

Originally Posted by PhxMJ

When valuating businesses, top-line revenue is as important as profitability. It may pay to increase revenue at the expense of profitability. In my case, I would have been better served to increase revenue $2MM at the expense of $500K in profits.

If my company had $30 million in revenues instead of $5 million, yet earned 1/2 of what it earned, I could have sold to the first buyer at my door and for more money. Of course, this is not a hard-n-fast rule (very industry dependent) but its something to think about.

Thanks! I understand now.

Again, congratulations on your success. Wish you nothing but the best for the future.

Also, great points in original post...thanks!

Congrats PHX!!

I have a question though about building a business, and then building another one: can't you start a business, build it up, then hire some professional managers to continue running it and growing it, and you move onto foundng and building another business, which you would then hire professional managers to run and grow more after a certain point, etc...

For example, Richard Branson and Russell Simmons both own multiple businesses, which they found, and then eventually hire professional management to run, I believe. And sometimes they sell (for example Branson sold Virgin Mobile for $1 billion, Simmons sold his hip-hop clothing line for nine figures, though I believe he still controls it, etc...).

I wonder about this because I have ideas for multiple companies I intend to start.