Straight-Up Advice On Selling Your Business

This is a run-down of my advice to entrepreneurs on selling and exiting their businesses. No one talks about the personal dimension, so I try to cover both business and personal issues. The format is inspired by James Altucher’s recent TechCrunch FAQ sheet on starting a business. Feel free to disagree or add to this, and I can go deeper on specific topics in future posts. Here goes:

Wait… who are you to give advice, Jeff?

I’ve built & sold two businesses — one successfully, the other less so. I’ve helped friends sell their businesses and have participated in “forums” of recently exited entrepreneurs, both the sappy, what-to-do-now kind and the practical, how-do-I-manage-my-money-as-a-rich-guy kind.

I’m not an expert, just a guy who’s learned the hard way on a few of these items and did well on most others. Can we get on with this now?

Yes. Should I hire an investment bank to manage the sale of my business?

If it’s worth more than a couple million, YES. No-brainer.

If it’s a soft landing type deal, no. Manage it yourself or by your VC.

If it’s an eye-popping sum that defies any sense of true value, consider taking it.

How does the auction process work?

It works like real estate. The banker is your realtor. The realtor puts together a brochure (your prospectus), advertises (shares the prospectus with a wide range of possible buyers), organizes the open house and various showings (your road-show or in-person meetings), collects offers (bids), facilitates inspections (due diligence), and finally closes the transaction. Whew!

How do you choose the banker?

Same as in real estate: First, look for a well-regarded bank that serves your industry and size of company. Then find a banker there who’s handled similar transactions, is well-connected with potential buyers, and whom you like and trust. Ideally, you should cultivate this relationship 2+ years before a transaction. They can help you prepare.

Should I negotiate the terms of engagement with the bank?

Yeah probably, but don’t over-think it. Just make sure they are aligned around your definition of success.

Should I use my normal business lawyer to handle the transaction?

If it’s a million-plus transaction, absolutely not. Shop for an M&A lawyer, ideally with experience in your industry and with the size of your transaction.

If it’s a small deal or soft landing, your normal business lawyer is probably fine.

I’m choosing between an expensive attorney at a white-shoe firm and a lower-rate attorney from a lesser known firm?

Use the expensive one. Always error on the side of over-paying for legal matters. Sucks, I know.

What should I know about tax planning?

It’s extremely important. Long before any transaction, have a conversation with your accountant or tax attorney about your plans to sell.

If you can do so, be an S-Corp and LLC rather than a C-corp.

If you can do so, sell the stock of your company rather than the assets.

If you can do so, locate your company in a low-tax state like Florida rather than a high-tax one like New York. Ditto for country if that’s feasible.

Before the transaction, have your accountant create a spreadsheet that shows after-tax payouts based on various deal structures.

Make sure you understand your cap table. Connect your cap-table to the payout analysis. You need to know exactly how you and other shareholders will fare in various deal types on an after-tax basis.

What should I know about earn-outs?

If your business is founder-dependent, there will likely be an earn-out.

An earn-out can be a material part of the deal, so don’t ignore it.

Shorter earn-outs are better than longer ones.

Uncapped earn-outs are better than capped ones.

Make sure your earn-out is secured, so it’s higher up the liquidation waterfall in the event of a restructuring. (Many business owners get screwed this way.) Push hard for this.

Earn-outs are often based on a multiple of earnings growth during the earn-out period. So if you sold for 9x EBITDA multiple, the earn-out may pay 7x your EBITDA growth during the earn-out period. Higher upside obviously is better.

Most business owners don’t like working for the new owners during the earn-out period. Again, shorter is better.

I just sold and exited my business, and it was a big success. What should I be prepared for emotionally?

Once the celebrations have died down, be prepared for some post-partum depression. The more closely you identified with the business as “your baby”, the harder this will be. Don’t complain about this to your friends. They won’t understand.

I just made a pile of money. Why do I feel like shit?

Just covered that. See above.

How long will it take to get back on top of my game?

It will take you longer than you think. Read this white paper, Life after an exit: How entrepreneurs transition to the next phase. I also recommend the book Chapters by Candice Carpenter (yep, the iVillage one). If you’re having an identity crisis, that’s pretty normal. Embrace it.

Now that I’m rich, should I move to Tahiti and completely change my life?

No. Don’t rush to make significant, permanent changes in your life. The rule of thumb is that there are three major areas of change in your life: your career, job, and home. Changing all three at once is a recipe for disaster, or at least depression.

Besides, by now you’re probably realizing that you’re really not that rich. It’s funny how the bar keeps getting higher.

Should I make big spending decisions?

Don’t make any major financial purchases for a year. Sock away at least 95% of your proceeds. Set aside a small percentage to reward yourself with some indulgences: a nice watch, a cashmere hoodie, or better yet, some travel funds.

Should I go to India for a few months?

Yes! If you can do it, this is the perfect time to travel, spend time with family, and cross a few things off the bucket list. Treat yourself with experiences rather than things. Take some time to catch your breath and savor those you love. Be prepared for “a few months” to turn into a full year, though! This isn’t such a bad thing.

What about financial planning?

If you haven’t already done so, hire a fee-based financial planner to put together plan in conjunction with an estate attorney. You should have a living will, medical power of attorney, revokable trust, and some Monte Carlo scenarios showing how you’d fare in retirement.

Should I hire a fancy wealth management firm?

No. Most of the wealth management industry is a racket.

In the near term, stick with your current set up, be extremely conservative with your investment strategy, and invest in your own education through books like David Swensen’s Unconventional Success and groups like Tiger21. As a Boglehead, I’m a big fan of services like Vanguard and Wealthfront.

Over time, interview different investment managers and see who you trust. Get recommendations from people you know and respect. Ultimately, you’ll need to decide whether to remain “self-directed” or to hire someone else to manage your funds.

What if I want to try my hand at stock picking or angel investing?

That’s fine if you limit it to a small percentage of your funds, but don’t rush it. Consider a “barbell strategy” with your investments: a nest egg that you manage very conservatively, and a small “shoot the moon” fund that you manage more aggressively.

My friends and family are asking me for money, what do I do?

Small, one-time gifts are fine, but set clear boundaries and do not brag about your wealth. Don’t rush to become The Rich Dude everybody turns to, even if it feels good to your ego.

What about when people ask to borrow money?

Lend very selectively and never out of a sense of obligation. One rule of thumb is to lend money on the assumption you won’t get paid back. If someone asks to borrow so much that it would negatively impact your relationship if they don’t pay you back, then that’s too much.

Saying no can be hard. It’s useful to have a few face-saving excuses on hand like: “I don’t have much liquidity right now” or “My financial advisor is keeping a pretty strict leash on me right now.”

We’ve covered successful exits. What’s your advice for soft landings?

What do you mean?

How do we make one happen?

Once you’ve decided to exit, discuss with your board a sales process, strategy, and timeline. You want to make sure you get buy-in from your board and investors. Come up with a list of possible buyers, draft up a prospectus or PowerPoint, and start picking up the phone. Leverage your VC’s networks.

How do I talk to my team about this?

As openly and directly as possible. Demonstrate that you take their role in the company seriously, along with their issues and concerns. If you have to lay anyone off, give them a severance. Fight for this, even if money is tight.

Some of my investors may lose money. How do I deal with them?

Demonstrate that you take your investors’ interests seriously. Communicate regularly and explain clearly how you’ve arrived where you are. Manage expectations and enlist their help in the sales process.

My startup was actually a train wreck and my co-founders and investors were douche-bags. Should I talk about that?

No. First of all, every startup is a little bit of a train wreck, so you’re in good company. Secondly, YOU’RE the one who looks like a douche-bag if you start trashing others. Finally, if you really believe everyone else was a douche, maybe the issue is with you. Chances are, you made mistakes just like everyone else.

It’s perfectly okay to write post-mortems and process the experience. Just try to be gracious to the others involved. That applies to you too: don’t be too hard on yourself.

I sold my business in a soft landing. It wasn’t the home run we wanted. Should we announce it publicly? How do I deal with the PR, even though I feel like it was a failure?

Yes, announce it publicly. Take the offense, but don’t over-sell or over-state your success. An exit is an exit, and people respect that.

Sometimes I feel like a failure. Other times I feel like a wunderkind. What gives?

Dude, you’re just human. You just sold your business. Maybe you’re rich and famous now, maybe you’re not. You’re still the same person. In fact, now may be a great time to work on yourself. Have you thought about talking to a therapist? You may want to attend one of the programs at The Hoffman Institute, which is like years of therapy packed into a week. Heavy stuff but totally worthwhile.

What do I write on my Twitter & LinkedIn bios now?

Write whatever you want. It’s okay to be “independent” for a while. It’s actually a luxury. Embrace it and enjoy the journey.

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