If you have considered selling your business of late, you may have been disappointed to see the offers a business like yours would garner on the open market.
Companies with less than a million dollars in sales garner significantly lower multiples of profit, and larger businesses may get closer to five times the pre-tax profit, but 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.
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 or 2020 to be reminded that economic cycles go in both directions and pandemics come out of nowhere. While business may feel good today, the next five years could well be bumpy for a lot of founder
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.
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 three 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 three 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.
Tax Treatment
Depending on your tax jurisdiction, 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 tax treatment of a business sale.
