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Separating Emotion from Prudence When Valuing Your Business: Why This Balancing Act Can Make or Break Your Ability to Gain and Preserve Wealth

Written by  Lance R. Tullius


A few years back, I heard an interesting quote related to my line of work as a merger and acquisition advisor, and it has stuck with me, perhaps more than any other. First, some context: I was in a closing involving the sale of a client’s business. The client, by all accounts, was a very successful businessperson that had started, built, and sold numerous businesses.

I hadn’t been involved in any of his previous transactions, so this was my first opportunity to have represented and advised him. But from working with him on this deal, I could tell that he had done quite well and was independently wealthy. He was not showy or lavish, but was very sensible and extremely fundamental. For that reason, more than any other, I found it fascinating to be in his company. I could tell that other people enjoyed being around him as well.

During the closing, as various documents were circulating, there were those inevitable moments of down time, and one of the lawyers asked my client a question, of which the answer so perfectly addressed one of the major challenges in my business. The lawyer asked, “If you had to point to one thing that has led to your success in business, what would that be?” To which my client responded very dryly, “I’ve always sold my businesses too early.”

How prophetic, I thought. And by the raised eyebrows in the room, I could see others felt the same way. Bearing an emotionless look, you could tell this guy was dead serious. He then expanded that in hindsight, he had most always sold businesses he owned before they reached their peak in market value. However, it wasn’t until he had sold a few of his businesses that this became a calculated strategy of his. You see, he realized in time that he always generated excellent returns on his investments. Actually, he had never lost. And he would follow a business after he sold it, as well as the industry it was in, so he knew in hindsight if whether he had held the business longer, he could have sold for even more money.

But he was also keenly aware, unusually so I’d say, that businesses and markets can change on a dime, they’re inherently risky, and that there is a direct correlation between risk and reward. So, he explained, he got scientific about it. He hypothesized that by selling early he made a stellar return with substantially less risk. Alternatively, with respect to each of the businesses he had sold, had he held them until their approximate peak in value, he estimated he likely would have fetched another 10 to 15 percent or so. But that’s assuming he would have guessed (yes, I emphasize guessed) correctly the timing at which the business was at its peak value, which can only be known with the benefit of hindsight. And further, in holding the business longer, there’s an inherent risk he would have born. Removing that added risk, he reasoned, was worth something. And finally, and I think most profoundly, he took into account what the impact might be if he held onto a business too long, and sold too late. That possibility, to him at least, was far more painful, than the likelihood that he might have left some money on the table.

Business owners ask me all the time, “When is the right time to sell?” You can guess, the easy answer for me now is “too early.” But seriously, “too early” is a fabulous answer. If that’s the case, why do most business owners sell too late? In fact, most business owners sell either in a down market or when their health or age dictates retirement. Why? Because as human beings, that’s our make-up. Think about it. We flee from things when pending doom is on the horizon. And we gravitate to things when the future looks bright. This is the buy-high, sell-low phenomenon. It’s what everybody does: buy when everyone else is buying and sell when everyone else is selling. Yet history has indisputably proven that people who do the opposite accumulate the majority of the wealth. I assure you that the recession we are now coming out of created a new flock of multi-millionaires, despite the toll it took on the masses. In 2008 and 2009, we saw a massive exodus from stocks and real estate; everyone was selling. And those that were buyers then, when everyone else was selling, made out in a big way. Of course, these are fairly extreme examples, but similar circumstances occur all the time at much smaller levels.

So how can you apply this sound judgment in today’s market? Well, let’s take a quick look at what’s happening in this current market. First, the market is loaded with liquidity, with corporations and investors lined with record amounts of cash. These folks have limited options for where to deploy this cash. Banks are paying barely any interest, and while companies are hiring, I wouldn’t say they’re doing so at robust levels. And organic business growth remains hard to come by, thus somewhat stifling capital expenditures. Acquisitions, on the other hand, provide a perceived sound means for deploying capital and generating good to excellent long-term returns.

To this end, many large companies and institutional and private investment firms have set aside significant budgets strictly for prospective acquisitions and are almost mandating that this money be spent. On the other hand, while demographic trends continue to yield enough sellers to make for a decent mergers and acquisitions environment, there’s not exactly an abundance of sellers at this point. However, I suspect there will be in time. And as we see more sellers populating the landscape, you can be sure that the scales will tilt back to a level that, at best, favors neither sellers nor buyers. In the meantime, we remain in the midst of a seller-friendly market.

Selling your business in this current market represents selling early, which means winning. Mind you, that’s not to say that you might not be able to sell your business for more at some point in the future. You may. But believe me, I’ve seen way too many business owners sell their business too late, trying to catch that elusive peak and bring in every last dollar possible, only to end up on the wrong side of that peak with downhill momentum working against them. They say pigs get fat, and hogs get slaughtered. Nothing could better describe this mentality.

So if you’re that business owner considering selling your business, and find yourself wondering if it’s the right time, think about it this way: You can’t do anything about the past—it’s gone. If you sell now, you’re more than likely not selling too late. Which leaves only two scenarios: you’re either selling too early or at just the right time. In either case, you win!

Lance R. Tullius is a Partner at Tullius Partners, an investment banking firm that specializes in providing merger and acquisition and financial/strategic advisory services to companies operating in select industries.


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