Should You Sell Your Company or Milk It?

By Edward Valaitis, Edison Avenue | January 11, 2016

If you have considered selling your business recently, you may have been disappointed to see the offers a business like yours would garner from would-be acquirers.

According to our recent analysis of some 19,000 business, the average offer being made by acquirers is just 3.7 times the company’s pre-tax profit.  Companies with less than a million dollars in sales garner significantly lower multiples, while larger businesses may get closer to five times the pre-tax profit. Regardless of size, private company multiples 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, you might reason that if you hang onto your business for four or five more years, you could withdraw the same amount in dividends as you would garner from a sale and still own 100% of the business.

This logic – let’s call it the “Just Milk It Strategy” – seems sound on the surface, but there are some significant risks to consider.

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 risk. 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 whether thanks to the economic cycles, illness, or industry changes.

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 and decisions to keep the business operating. You can’t be completely present.

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 now. 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 replacement 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 situation, the sale proceeds of your business may be more favorably treated than 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 capital gains tax treatment of a business sale.

5. Get Your Time Back

Time is more valuable than money. If you lose money you can make it back, but if you lose time you will never get it back. What is the highest and best use of your time in 2016 and beyond?  Maybe it’s time to sell — or maybe it’s just time to get ready to sell. 

6. You Can Do Better

Finally, you shouldn’t hold onto your business just because you assume you can’t do better than the market’s going rate. Depending on your business, you may in fact be able to attract an offer higher than three or four times your pretax profit. The businesses we work with who have a Value Builder Score of 80 + get offers that are, on average, 6.1 times their pretax profit. Some of the owners we work with do even better, stretching multiples into double digits.

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For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.