Business Broker Blog

Stay and Grow or Sell and Go?

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There is a saying among business purists that you should run your company "as if you're going to sell it tomorrow". In other words, have all your customer, vendor, & employee contracts in place, train your employees so that you're irrelevant, streamline your systems and workflow and, most importantly, maximize your cash flow.

But what if you're in the early stages of a high growth period and you want to invest in the resources to achieve that high growth.  How do you pay for it?  Debt is expensive assuming you can find it and it ends up as a liability on your balance sheet. Equity funding is very hard to find for a small company. The legal fees, compliance, and investor presentations can be costly and time consuming and you also have to give up a percentage of your company ownership.

So what other option is there? What about cash flow, assuming that it's sufficient to cover the needed resources? But doesn't that decrease the value of your company in the short term? Yes, in most cases (In some special situations, using the discounted future cash flow method of valuation, it may not. However you need the right buyer to accept your assumptions).

So using cash flow to fund growth in the early stage of a company may be the best option. But what if you've grown your company to the point where reaching the next plateau requires a huge cash infusion to obtain the necessary resources?  What if you realize that you don't have the necessary management skills to make it happen?  What if you're reaching retirement age and you don't have the energy required? Or you're just getting burned out and you want to do something else?

This is where Exit Planning comes into play. I'm not talking about the type of Exit Planning that takes place about 5 years before you exit and requires a cadre of advisors. The Exit planning that I'm referencing should take place 1-2 years (preferably 2) before you exit the company and its sole purpose is maximizing the value of the business. The cardinal rule here is "don't invest any money in the business that a prospective buyer wouldn't". At this point your goal is to have cash flow as high as possible. Assuming that the other parameters mentioned above are in place, this should maximize the value of the business.

For another slant on this subject, refer to my blog titled "Strategic Planning - a Business Owner's Story".