Is it time to sell? Or should I keep running my business?
Most entrepreneurs will have to answer this question at least once during their careers. Many will answer it multiple times.
But one thing won’t change. Every time this question arises, it will be one of the toughest decisions any business owner has to make.
One of the things that makes this question so difficult is that most entrepreneurs approach it as an all-or-nothing proposition. Either I sell or not. End of story.
I’d like to suggest a third possibility – a partial sale that truly offers the best of both worlds. But before I elaborate, let’s look at some data that underscores just how reluctant owners are to let go of their businesses.
A new PwC study reports that 53 percent of U.S. small business owners simply don’t want to retire. Instead they’d like to continue to work, at least part-time. Only about one in four would retire completely. These findings are not new. In fact, they are essentially unchanged from similar surveys conducted in 2010 and 2014.
I have to admit that, at some level, this kind of commitment to the business is admirable. It shows these entrepreneurs still have all or most of the energy, skill and drive that made them successful in the first place. But there’s just one problem. The average small business owner has 75 percent of his total net worth tied up in his business.
And that’s not as admirable as it is risky. Professional money managers will tell you that you should have a well-diversified portfolio. The goal is not only to generate growth but to protect your principal by spreading risk.
The oilfield services industry provides a good example of what can happen without a strategy to share risk. More than two years ago when OPEC decided to increase production, the price of oil dropped from $100 a barrel to less than $50. Most fracking operations in the U.S., which needed a higher price to be profitable, stopped production. Many small oilfield services operators were forced out of business. Those who survived saw their margins squeezed to a point from which they may never totally recover.
What could they have done differently? One solution is a partial sale. Some call this OPM or using “other people’s money.” Regardless, it’s a good way to diversify risk.
A partial sale provides an opportunity for business owners to take some cash from their business, spread their risk and continue to run the business. They can bring in a deep-pocketed financial partner to buy equity in the company, a partner who has the capital to help grow the business without risking all of the owner’s assets.
This is the best-of-both-worlds option.
A professional investment banking firm with considerable experience in putting together partial sales can help a business owner achieve greater financial security. Allegiance Capital has nearly 20 years’ experience in providing this type of service to lower middle-market business owners.
And the timing couldn’t be better. With the current conditions in the M&A marketplace, it’s a great time for small to mid-sized business owners to sell part of their businesses. Valuations are high and investors are lined up to invest some of the estimated $2.5 trillion that is on the sidelines.