Negotiation · Term sheet

Keep a business cash cow or sell it?

Kevin Lentz

August 8th, 2014

I am negotiating the sale of my brick-and-mortar business that throws off good cash with very little work on my part.  I have a buyer, and we are relatively close on price, but have fallen below initial price during negotiations and loan approvals.  I am anxious to sell the business because I believe it has a relatively short life left.

I am trying to figure out if I should sell now, take a lump sum and carry paper for the balance, or if I should keep the business, keep the salary it throws off, and let it run its course over the next couple of years and eventually die.

I would love feedback in how to tease this out, as my interest in this business is also closely tied up to a second fledgling startup I have founded.

Sloan Eddleston Chief Operating Officer at The New Republic

August 8th, 2014

That's a good situation to be in! ha.

I think the answer is both mathematical and psychological/social.

Mathematical: what is the Net Present Value that you believe the current/future cash flows to be worth? That is a question of estimating how much cash you'll throw off this year and every year in the future (discounted for the "time value of money" since a dollar today is usually worth more than a dollar in 5 years given inflation and your ability to use that money to make additional money). To determine that 'discount rate' you'll want to figure out what you could reasonably earn with that dollar over time - search the net for some examples there. There are important tax implications, too.

Psychological/social: do you think you'll be happier/better off getting a lump sum or getting an annuity over time? Do you need the money now (eg for a house or new business or investment opportunity?) Or would you rather feel like you have an income stream coming in? Are you prone to spend money when you have it in ways you wish you wouldn't? Your time is probably also worth something and I'm guessing you'll spend time on it in the years to come if you still own it, even if you don't spend a lot? And what about the stress level? Especially if you think the business model might die, that might be stressful

Matthew Cordasco Co-founder and Head of Product

August 8th, 2014

Cash is King and tomorrow is promised to nobody.  If you have a reasonable offer, take it.  Avoid stipulations, milestones or earn-outs.

Then go pursue something you are passionate about, i.e. your second startup.

M

Dimitry Rotstein Founder at Miranor

August 8th, 2014

All other things being equal, if you expect the business to go on for a certain period of time, then you can calculate the total sum that this business will bring you, and then sell it for more than that.

Travis Somerville Bridge between people and technology

August 8th, 2014

Just adding one type of math equation you can do - a probability table.  This may help it not be such a gut-guessing decision in case there are multiple scenarios going on inside your head.

Take @Sloans advice about Net Present Value, but do that calculation with more than one probability.  For instance, if you think there is a 80% chance the business will end in 5 years and also a 20% chance it might gain new life and keep producing cash for 20 years... Then calculate NPV for the 80% case (where business winds down after 5 years) and multiply times .8.  Then calc that NPV for the 20% case and multiply by .2.  Then add those two numbers together.

What might be keeping you from selling in the back of your mind is that there is a probability that different things will happen.

Then you could do the same probability table for what you think you'd be doing if you sold.  Like 35% change you'll make $X amount of money.  50% another sum of money, and 15% yet another sum.  Try to compare them all taking time value of money into account.

Cheers!

Lawrence Lerner Digitalization and Transformation Coach

August 8th, 2014

Agree with @Mathew. If the offer is reasonable and exceeds what you would make over the life expectancy run with it. Otherwise, if it truly is low maintenance then let it fund your new company while it runs out. You may still sell at a profit in the end by selling off some tangible or intangible assets.

Samik Raychaudhuri

August 8th, 2014

From math perspective, Travis' suggestion is spot on. Consider in ranges, not in a single point. There are always multiple possibilities, with a chance associated with each of the scenarios.

Michael Barnathan

August 8th, 2014

You already have all of the information you need: your expectation of how long the business has left and your revenue, against the sale price. Favor the sale if the two are close, because your time is worth something too.

Knowing only what you posted, it sounds like you've mentally moved onto another startup, so it's probably best to sell and focus on that one.

Vijay MD Founder Chefalytics, Co-owner Bite Catering Couture, Independent consultant (ex-McKinsey)

August 8th, 2014

Outside of the cash considerations are the psychic ones.  Which one creates more distraction/ headaches (keeping vs. selling).  Are you able to move forward on the new business without the cash from the old one?  Are there any synergies if they're related?

Don Ross Managing Partner Digital Health at Life Science Angels

August 8th, 2014

Critical information is missing: "take a lump sum and carry paper for the balance."  How big is the lump sum vs the balance that you finance?  And how does this compare to your annual sales/profit?  If the lump sum is sufficiently large, I agree with the others who are saying "take the money." If most of the sale is wrapped up in the paper, you would be taking a huge risk that the buyer could manage the business so that you will actually get paid. 


Mitchell Portnoy Healthcare Information Executive

August 8th, 2014

You've already had sufficient and learned advice on calculating the value of business and I couldn't improve on it.  There are however other considerations in addition to the present value calculations that are not easy to estimate but are equally or perhaps more important.  I'd be happy to discuss these off-line and have sent you my phone number if you'd like to hear more.

It's a nice problem to have!