If You Own a Profitable Small Business, You'll Make More Money by Not Selling

In almost all cases, the most value-enhancing course of action for the owner of a small business is to stay the course and not sell. Here's the math. Let us assume that you own a firm generating $7 million in revenue and are taking home $1.5 million in profit a year (around $1 million after tax). Let us further assume that you come to an agreement to sell your company at $7.5 million — all cash, no seller notes or deferred payments. This is a huge economic windfall. But if you were to invest the after-tax amount (around $6 million) in a mutual fund that you expected to return 10% a year (and that's a high estimate), you'd be making around $600k a year pre-tax and likely well under $450k a year after taxes. That's a lot less than you were making before when you owned your business. This should not come as a surprise. As the owner of a business, you are shouldering the burden of running an organization, monetizing your expertise, and taking on a considerable amount of risk. In selling your business, you are relieving yourself of the duties of an owner/operator and passing those responsibilities — along with the associated risk — to another party. This does not mean it's a bad idea to sell. There are many other good reasons to sell a business — de-risking, interest in other pursuits, retirement, health, and so on. Furthermore, there are ample opportunities to strike a middle ground by adding provisions to your deal such as rolling over some equity. If you are considering the sale of your business, you may be interested in some of the resources posted at eaglepeakcap.com/resources. And if I can be of assistance, please reach out to me at rknauer@eaglepeakcap.com. Thanks, and stay well!