Are You Gambling With Your Financial Future?
Many business owners are like gamblers sitting at the blackjack table in Las Vegas. When their company is doing well, they are winning and cash is piling up. They can’t imagine walking away and foregoing all the potential profit. But a wise gambler knows it is impossible to beat the house over a long period of time, and they will cash in while they are ahead. Like a wise gambler, business owners should realize that cashing in today while business is booming is a great way to beat the odds and come out on top - even if they think they could win more by staying in the game. As country crooner Kenny Rogers reminds us in "The Gambler", "You have to know when to hold them, know when to fold them! Know when to walk away-and when to run!"
Why should you sell your company today when you believe it will be worth more tomorrow? The simple answer: unpredictable markets. Key employees may leave. Customers may defect. Competition may intensify. Owners age, get sick, or become fatigued. As it turns out, predicting the future of even the most successful business through today’s stellar performance is not foolproof.
In early 2007, a business owner came to Allegiance Capital to discuss selling his company. The company was doing very well, and was poised for even more growth. Based upon potential future growth, he decided to delay the sale. However, the Great Recession hit, and the company’s value declined approximately 30%. Recently, he called to say that he is now ready to sell his company, because it had finally returned to its 2007 performance levels. With market conditions improving almost daily, the owner should be able to get as much or more than he could have received in 2007.
No one can control the economy any more than they can control the cards being dealt at a blackjack table. Even if you believe your company will be worth more tomorrow than today, and you trust your ability to sustain steady growth amidst market changes, you should still consider the time value of money. For example, would you rather have $99 today or $100 one year from now? Most people would take the money today. How about $50 today vs. $100 in one year? Most will wait for the $100. This illustrates the time value of money.
The value of a dollar invested in a business today is determined by the risk involved in the business compared to other types of investments. For example, a low-risk business services company with a solid customer base, a high level of repeat business, very fragmented competition, and low capital requirements faces less risk of loss. The owner can be fairly confident in his or her financial projections, and won’t take the $50 being offered today. He or she will wait for the $100 because the business is very stable with minimal risk.
In contrast, a biotech entrepreneur whose company is developing a new drug faces an entirely different scenario. The new drug could be a financial home run, but just as easily the company could strike out if the drug doesn’t prove effective. Only after thorough testing, FDA approval, and investment of large amounts of capital, will the owner know if the business is a winner. The owner may be willing to take the $50 today, as opposed to rolling the dice for a shot at $100 in the future.
Unknown risks may also be lurking around the corner that cannot be predicted or controlled. New competitors can move in, new and expensive technology can replace proven methods, and finally, the owner’s health can deteriorate.
Selling all or part of the company enables the owner to take some chips off the table while the company is still performing well, and it provides two distinct benefits. It ensures the owner’s personal financial future through investing the money in safe investments, and it taps into any future success as the company grows. Even if the owner’s health declines or the company performance dips, the funds invested from the sale will still be available.
Selling for less today may be your first step to a more stable financial future tomorrow. Don’t gamble with your financial future. You can sell and still stay in the game.