It’s easy to forget now, but Michael Dell was the Mark Zuckerberg of his day.
Hailed as a young genius, he created the inexpensive, made-to-order personal computer in his University of Texas dorm room and sold it straight to the public. In the 1980s and ’90s, his face appeared on magazine covers, and well before he turned 40, he was a billionaire CEO, ranked alongside Bill Gates and Steve Jobs.
But that was a long time ago in the fast-moving world of high technology. Now the PC is getting eclipsed by smartphones and tablet computers and Dell’s stock trades at roughly $13 from a peak of $53 in year 2000.
For nearly a century, no company commercialized the camera as successfully as Kodak, with breakthroughs that included the Kodachrome color film, the handheld movie camera, and the easy-load Instamatic camera. But Kodak’s storied run began to end with the advent of digital photography and printers, software, file sharing, and third-party apps. Since the late 1980s, Kodak has tried to expand into pharmaceuticals, memory chips, healthcare imaging, document management, and many other fields. But the magic has never returned.
Vijay Govindarajan, a professor at Dartmouth’s Tuck School of Business and co-author of The Other Side of Innovation, says successful companies tend to fall into three traps that make the glory days fleeting. First is the physical trap, in which big investments in old systems prevent the pursuit of more relevant investments. There’s a psychological trap, in which company leaders fixate on what made them successful and fail to notice when something new is displacing it. Then there’s the strategic trap, when a company focuses purely on the marketplace of today and fails to anticipate the future.
But not just large companies fall into these traps. Smaller companies can too. In fact, a lot more smaller companies fail. According to the U.S. Small Business Administration, about 50 percent of businesses fail in their first 5 years and 75 percent fail in the first 10.
So, how should you to decide when to sell your company?
Facing the issue of succession or continuation of one’s business is similar to addressing the need for life insurance. Neither subject is addressed with much enthusiasm by the average person. The prudent address the inevitable and prepare. As with the purchase of life insurance, the decision to sell or plan a viable business’ succession can be continually postponed. Unfortunately, when a business must be sold, it usually is too late. Few people are willing to buy a business that has to be sold. Of the many businesses I have sold, less than a handful were from desperate sellers.
The best decision on when to sell is purely an analytical one, not emotional. Businesses fetch the best value when they are growing. So, find your estimated selling price-range by multiplying your trailing 12 month or last year’s profit (before tax) by 2.5 and 3.5 to arrive at lower and upper price range for ecommerce businesses up to $2.5 to $3 million in revenue. Next, visualize your business over the next three years and estimate how it will grow. Then ask this question: Would you rather sell today using the above formula, or take a chance that you can sell your business for a higher price in three years?
If you can’t decide using above method, here is another one. Circle your answers to the following questions, then see below to see how you scored to decide whether you should consider selling now or later.
- Is your business less enjoyable now than before? Y N
- Does your business challenge and excite you less than before? Y N
- Do you think of selling your business more often now than you did before? Y N
- Do you find yourself complaining more? Y N
- Has the business come between you and your family? Y N
- Has your business begun to level off or decline? Y N
- Are you concerned you no longer have the stamina your business requires? Y N
- Do you ask yourself, “What would I do if I sold?” Y N
- Do you often wonder, “What is my business worth?” Y N
- Would you be hesitant to personally guarantee a sizable loan to grow your business? Y N
To determine if now is the time to consider selling, count your “yes” answers.
- 0 to 3 yes answers. Congratulations. You are happy and likely quite prosperous in your business. Keep it up.
- 4 to 6 yes answers. Pay attention to your early warning signals. It’s best not to make the mistake of staying too long. Sell while you are still having fun. It is best to start the preparation process early. The actual sale of a business can take a long time.
- 7 to 10 yes answers. Do not let time spoil the fruits of your labor. Choose what you want to do next, then act.