“They called out of the blue and offered $23 million for my company,” Elizabeth (not her real name) said as we started our meeting. “I’ve only been in business four years, I didn’t think I’d get to this point so soon,” she said, “The way we are growing, if we hold on for few more years, we might get to $50 million. That has a nice ring to it. But hey, I don’t want to look at gift horse in the mouth. What are my options?”
This is, as they say, a nice problem to have. Elizabeth has been in business just four years and is already looking at an unsolicited $23 million cash offer for her company. Obviously, she’s one bright lady, but Elizabeth seems to be more astute than most entrepreneurs with whom I work. Most business owners in this situation usually ask the wrong question, such as, “Is this the best deal?” But notice that Elizabeth asked a different question, “What are my options?” Let me explain how those two questions are different and why it’s so important to focus on options, not “the deal.”
While nothing is certain, we believe Elizabeth’s revenue will grow 35-40% per year for the next few years because she has a proprietary product that is just starting to get market adoption. Her product could disrupt her industry even more than it already has, which is likely why she got the unsolicited $23 million offer from a competitor.
When Elizabeth told me she wanted to assess her options in light of this unsolicited offer, I suggested we meet again and that she invites her accountant and wealth planner. I encouraged her to not look at this offer in the abstract (i.e., is it a good deal?), but to instead evaluate the offer relative to her life goals. By having her accountant and wealth planner in the evaluation process, she can assess the after-tax implications of the offer, then see how that amount could be invested to fuel her life goals. Let me repeat, I was encouraging her to look at this offer relative to her life goals, not just whether it was the “right number,” which in her mind was $50 million.
I opened this second meeting by presenting Elizabeth and her advisors my assessment of her company’s current market value. Based on the net present value of her projected cash flow and researching recent market comparables, I was comfortable we could take her company to market now and get offers in the range of $25 million to $28 million. I described the list of potential buyers, strategic and private equity, that would likely pony up that kind of offer. But I also presented something Elizabeth, nor her advisors expected. I presented an analysis of how much she could make if she kept running her business and sold it in 4 to 5 years. Remember, she wanted to know her options, so evaluating a “hold and sell later” option had to be on the table. My analysis of her business and its growth rate gave me confidence we could sell the business in 4 or 5 years for her target of $50 million, possibly even more.
If given the choice to take $25 to $28 million now or wait 4 or 5 more years to maybe have at least $50 million, the logical question should be “What’s the risk of waiting?” That’s why it was important to have Elizabeth’s financial planner in the meeting. He helped her understand how she could invest the after-tax proceeds of a sale now and helped her measure the risk of holding the company for the next few years. Sure, my forecast getting to a $50 million valuation looked pretty darn appealing, but it will take more investment in R&D and manufacturing equipment to get to that valuation. Moreover, we know there is at least one competitor that is better capitalized than Elizabeth, and if that competitor aggressively came after her customers, Elizabeth’s company could be in trouble. In other words, though there is substantial upside in waiting a few years to sell, that upside comes with significant risk.
After a couple weeks of risk/reward conversation with her family, Elizabeth called to tell me she decided to go ahead and sell now. Her exact words, “I am ready to take my chips off the table and move on with the next phase of my life.” She asked me to meet with the company that made the unsolicited $23 million offer and show them my analysis of why her company was worth closer to $25-$28 million. If that company could not get to a valuation of $26 million, she wanted me to take the company to market through a controlled auction process.
Here’s the lesson learned from Elizabeth’s astute risk-reward tradeoff. Instead of being emotionally tied to “a deal” that her ego tells her she wants, she adroitly analyzed how the business can be used to facilitate her life goals. I wish I had more clients like Elizabeth.
NOTE: this blog post was written in late 2022, Elizabeth’s company was sold in 2023 for more than the original offer.
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