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When to Sell a Small Business

So, when to sell a small business? Not every small business has residual value without its owner. For example, if a chef owns a restaurant and builds its reputation around his own cooking, loyal patrons may not continue to frequent the place if it changes hands. On the other hand, if the owner is not at the helm in the kitchen, they may earn themselves an early retirement and a lot more free time by handing over the reins to the chef or an outside investor.

Ever since Instagram — a tiny start-up with a handful of employees who managed to transform consumer photography without ever making a dime — sold out to Facebook for what originally looked like $1 billion in cash and stock, entrepreneurs around the world have dreamed and built their companies around a ‘grow it to sell it model.’

Had Facebook not come knocking, however, Instagram would have been left with the difficult task of monetizing their ‘free’ product. Perhaps they would have made even more over the next decade, but that’s a risk they decided not to take. Today, their work responsibilities are to invest their newfound earnings and tackle whatever project they fancy that comes along next.

Whether you run a shoe store or a tech start-up, many of the rules about when to accept an offer for a buy-out are the same. Here’s a few guidelines to follow on when to sell a small business:

Buy-out

Rule 1: If you could be outcompeted in the near future (especially by the entity offering to buy you out), seriously consider the offer.

After Yelp turned down a $500 million offer from Google, the search giant purchased Zagat. They’ve folded the Zagat review process into their own ‘Google reviews,’ where they often have the advantage of reaching viewers through search, long before they make their way to Yelp. It remains to be seen whether or not Yelp can outcompete and remain relevant.

Similarly, Zappos agreed to a $1.2 billion deal with Amazon in 2009, likely fully cognizant of the fact that the online retail behemoth could quickly outcompete them if they held out.

Money to grow your own

Rule 2: If you don’t sell, make sure that you have money to grow on your own.

It’s tough to sell something you’ve built, and perhaps you still have ideas and a plan to expand your business and increase profits. If you’re going to need extra backing capital to get to that point, however, make sure that you can acquire that before passing up a good offer.

Backup Plan

Rule 3: Do you have a backup plan in place?

Groupon famously turned down a nearly $6 billion offer from Google in 2010, opting instead to take their company public on the stock market. Although they still make a nice profit from that decision, it now appears that they would have made a lot more by selling out, considering the dismal performance of their stock in 2012.

Still, that’s not to say that Groupon made a bad decision. They had a plan and they followed it, sticking to their guns. They’ve made a profit, despite losing out on a bigger one. Had they not sought capital to grow through the public offering, however, Groupon would have been highly unwise to hold out.

In the Future

Rule 4: What do you want for yourself down the road

Why did you start your company in the first place? If it’s because you love your work and want to do it every day for the rest of your life, then by all means, resist any buy-out offers and keep chugging away. But if your motivation was largely to make money and eventually retire and not have to work, don’t look a gift horse in the mouth when it presents itself. A good offer is a good offer, and it could make your dreams come true sooner than you thought.

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One Response to When to Sell a Small Business

  1. Ron Immink May 28, 2013 at 9:01 am #

    Excellent article. Don’t think selling or exit is high enough on agenda of companies.

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