The Risks of ‘Just Milking It’ When It Comes To Selling Your Business

“Life is inherently risky. There is only one big risk you should avoid at all costs, and that is the risk of doing nothing.” – Denis Waitley, Motivational Speaker, Best-Selling Author

If you have been considering the option of selling your business, you may have been disappointed to see the offers a business like yours would fetch from would-be acquirers.

According to the latest analysis of over 17,000 business owners who have used The Value Builder System, the average offer is just 3.7 times your pre-tax profit. Companies with less than a million dollars in sales get significantly lower multiples and larger businesses may get closer to five times the pre-tax profit. However, regardless of the size of private company multiples, they are still significantly less than those reserved for public company stocks.

Given the paltry offer multiples, you may be tempted to hold on to your business and “milk it” for decades to come. After all, if you hang onto your business for four or five more years, you could withdraw the same amount in dividends, as you would gain from a sale and still own 100% of the business.

This logic – let’s refer to it as the “Just Milk It Strategy”- appears sound on the surface, but there are some significant risks to consider that prove that delaying the process may cost you in the long run.

1.  You Shoulder the Risk

The biggest downside of holding on to your business, rather than selling it, is that you retain all of the risks. Most entrepreneurs have an optimism bias, but you need only remember how life felt in 2009 to be reminded that economic cycles go in both directions. While business may feel good today, the next five years could well be bumpy for a lot of founders.

2.  Disk Drive Space

If you think of your brain like a computer’s disk drive, owning a business is like constantly running anti-virus software. Yes, in theory, you can do other things like play golf or enjoy a bicycle trip through Tuscany and still own your business, but as long as you are the owner, your business will always occupy a large chunk of your brain’s capacity. This means family fun, vacations and weekends are always tainted with the background hum of your brain’s operating system churning through data.

3.  Capital Calls

Let’s say your business generates $500,000 in Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA), and you could sell your company for four times EBITDA or keep it. You may argue it’s better to keep it, pull your profit out in the form of dividends, and capture the same cash in four years as you would by selling it. This theory breaks down in capital-intensive businesses where there is usually a big difference between EBITDA and cash in the bank. If you have to buy machines, finance your customers, or stock inventory, a lot of your cash will be locked up in feeding your business and the amount of cash you can pull out of your business each year is a fraction of your EBITDA.

4.  Tax Treatment

Depending on your tax jurisdiction, the sale proceeds of your business may be in your favour, treated as an income you would garner by paying yourself handsomely with the Just Milk It Strategy. You may actually need to pay yourself $2 or $3 for every $1 you can net from the advantageous tax treatment of a business sale. 

So the question to ask is, would you consider a sale in 2016 or take the risk by attempting to grow the business beyond current value? It’s a critical decision that business owners should not take lightly.

Getting a complimentary Value Builder report through The Osborne Group is an effective way of finding out how you might increase the value of your business and help determine the best time to sell. It all starts with answering a 15-minute on-line questionnaire developed by internationally recognized small business expert John Warrillow. Your answers will generate a personalized report based on findings from over 17,000 companies and covering eight key business value factors.

To find out how your company is performing, click here to take the Value Builder questionnaire: http://www.thevaluebuildersystem.com/osborne-group

To learn more about Value Builder factors and their impact on your company’s worth, see other blogs in this series: http://localhost/osborne/category/osborne-insights-blog/