As financial markets climb to new highs, the astonishing pace at which companies around the globe are being bought and sold parallels this traction. The frenzy of activity finds many founders wondering, “Is now the time to sell my business, too?” As entrepreneurs come to Altmaven with this very question, our first response remains the same: “Why do you want to sell?”
How a founder answers this seemingly simple question offers initial guidance as we work through the discovery process that follows. There are, of course, common elements to consider when debating if the timing is ripe for an entrepreneur to sell; right for themselves, their families, employees, and supporters.
Take it to the Bank
Valuations of technology startups are at record levels not seen since the dot com era, leaving many to wonder if the right time is now to cash in. Salesforce acquired Slack for 25x revenues, Vista Equity Partners purchased Pluralsight for $3.5B, and Wattpad sold for more than $600MM.
The price tags are getting larger, with more at stake than ever before. Entrepreneurs are seeing their peers sell for astronomical sums, wondering if they, too, could accomplish the same. As a first step, explore all your options. Don’t simply take the first term sheet offered without shopping around. If you were selling your house, chances are you would want multiple bids to evaluate.
‘Cause I’m the Taxman
While valuation is one component in determining what you’ll net from a sale, the looming threat of higher corporate and capital gains tax warrants further deliberation.
In Canada, the government currently offers a substantial tax break for owners selling their small businesses. Each Canadian has a Lifetime Capital Gains Exemption of $892,218—in other words, when you sell your business, any capital gains up to that amount goes right into your pocket, tax-free. Everything above that exemption, however, is taxed at the capital gains rate of 50 percent.
But I Want my Marshmallow Now!
Selling a company can be very satisfying, but what if you waited just a little bit longer? In a 1972 experiment by Stanford professor and psychologist Walter Mischel, children were offered a choice. They could have one marshmallow now or two marshmallows after 15 minutes. Some consumed the marshmallow immediately. Many sat content, waiting for their second treat.
Researchers followed up with the children years later. Children who managed self-control, waiting for the second marshmallow, had better life outcomes than those who didn’t. They had higher SAT scores, lower levels of substance abuse, lower obesity rates, better responses to stress, and more.
It appears that being able to delay gratification is correlated with better personal and social outcomes. The question is, have you waited long enough?
The Headline Number is Never as it Appears
The sale price of private companies reported in newspaper headlines can often be misleading. Deals can include shares, a vendor take-back (when a seller offers a loan to the buyer, paid back over time with interest), or a portion of the deal could be cash with the balance based upon performance incentives.
When Patrick Mahomes signed with the Kansas City Chiefs, the headlines shouted, “10 years, $503MM.” Digging deeper, we know that only approximately 30% of his pay, ~$140MM, was guaranteed. In football, as in business, the guaranteed number always matters most.
What Are You Trying to Accomplish?
It’s important to come back to the basics. Why did you start this company? What problems were you trying to solve, and have you solved them?
It’s important to know what you want to do and why you’re doing it.
Conjure up an Olympian’s mindset—every decision you make should have a precise goal in mind. The same is true for your business; your North Star acts as a single, clear, definable purpose based upon which all decisions are made.
Know Who You Are Dealing With
An underestimated aspect of the sales process is knowing whom you are selling to. Buyers undertake extensive due diligence in understanding your business, and a founder would be remiss not to do the same. Who else have they worked with? Examine their past deals. When acquisitions go well, everyone is happy. But should things go awry, you want to know in advance who your partner could become.
This is the End
Your company is meaningful to you and to the people who rely on your business for their livelihood. Family, money, relationships, health, and passion will all impact your decision. Armed with an astute awareness of all the factors: the market environment, your financial situation, your biases, and who you are doing business with, plus more will clear the muddy waters. As you continue to write the story of your business and your life as an entrepreneur, what does this chapter or the next entail—and how many marshmallows?
About the author: Jason Kirsch is the Founder and Managing Partner of Altmaven Capital, an alternative asset management firm that offers technology companies access to growth capital through equity and venture debt.