Sell Your Horse Before It Dies

by Charles V. Lemmon
I am old enough to have seen three major business cycles. I am old enough to have advised hundreds of owners struggling with the difficult decision to sell their business. While most chose to sell when a good offer meets their expectations, some foolishly say “No” to a cash offer at full market value. Those owners justify their refusal because they want “more.”

Too often, the strategy of holding out for “more” requires owners to retain significant business risks for a much longer time. These owners reason, “I can keep the business, keep my earnings, and sell for ‘more’ later.” I have watched owners sail away on that optimistic 

wave and rise on a short-lived crest. Then, to their disbelief, the bow of their boat turns downward and crashes among the waves of uncertainty, competition, and litigation. Those owners who could have been sellers found themselves bailing water. Then, instead of getting “more”, they are disheartened by their loss of business value.
Too often, greed is based on emotion. Rarely is it based on logic.
Many astute businesspeople have acted on good advice to sell and take their profits during good times. In decades of retrospect never do sellers say, “I wish I had held out for more….” There is nothing wrong with taking profits. Few criticize good judgment to collect cash.
In a world where many proclaim knowledge of the future but none possess it, it is reasonable that, in a majority of cases, an owner is better advised to convert a single large asset into cash during good economic times. Conversion to cash funds a complete investment portfolio outside of one business. Diversification is fundamental for long-term financial independence.
The time to sell is when a business is stable or growing. Sell on good news and when future prospects are bright. Sell on future hope and expectations. Sell while the tide is rising. To be lulled into complacency during times of an expanding economy can be a monumental mistake.
Several years ago, during a brief period of irrational exuberance, a major technology corporation offered to pay an exuberant price for its Texas-based competitor. The owner of the company being courted said, “I’d rather eat grass than sell to them.” Well, guess what? He’s now eating both grass and crow because his company no longer exists.
To sit still and expect that good times will continue is akin to cooking a frog. It is well known that you can’t cook a frog by throwing it in boiling water, because it will jump out. Instead, you put the frog in a pot of cool water and then put the pot on the stove. As the water temperature rises the frog relaxes, goes to sleep and, well, the frog is dead long before the water actually boils.
Owners can be overly complacent while relaxing in warm water – not knowing the heat is slowly rising. No professional would suggest that a seller accept less than market value, but owners who hold out for “more” leave themselves exposed to becoming boiled frogs.
It’s generally too late to sell after a catastrophic event. But some owners console themselves through rationalization. Let’s relax in warm water until terrorism goes away. Let’s wait for oil prices to go down. Let’s wait until interest rates trend downward again. Let’s wait….
During depressed times most owners try to sell their horse just before it dies. That’s not the time to sell! Auction your horse in growing markets when your horse has a victory wreath around its neck. Sell when your horse stands proudly in the winners circle. Holding on for “more” victory wreathes works occasionally, but only a very small percentage of owners ever say their horse went forward to win the Triple Crown.
I have heard some owners rationalize a deferred sale because a sale implies finality. A sale does not necessarily signal the end of a career. Consider an alternative. If work and ownership are important, then an owner might consider a financial recapitalization of the business to attract new financial and intellectual capital. By using a recapitalization, an owner can take substantial amounts of cash out of the business on a tax advantaged basis while continuing to own a meaningful portion (e.g. 20%) of the business going forward. Not only can an owner continue to contribute toward the company’s future growth and earn an annual income, but there will be a “second bite of the apple” when the newly recapitalized and larger enterprise is again sold in the future. Often, the 20% equity retained may later be sold for more than the original recapitalization, which put substantial cash in the owner’s pocket.
There’s another alternative. If continuing ownership is not important but the groundwork for future prosperity has already been laid, then it is reasonable to structure a two stage sale. The first stage brings current market value to the seller at the time of closing. The second stage brings additional future value in the form of an earn-out when the business proves-up the prosperity as arranged by the seller. If the company does well, the seller profits. If not, then the seller would not have received that future value anyway. In either case, the seller still gets market value on the sale date. But it certainly is consoling for sellers to have diversified cash investments as a tangible hedge against rising oil prices, terrorism, inflation or any number of business uncertainties that can defer business values for years.
Have you ever watched fireworks? Isn’t it fun to watch the sparkling rocket shoot up into the sky, burst into multi-colored patterns, and then fizzle in falling stars? Markets are like fireworks. They go up, burst, and then fizzle. And during the show, the fireworks engineer always mixes in a few chest thumping “BOOMS” to get everybody’s attention. While fireworks are bursting in business, such “BOOMS” also get the owner’s attention, but chest thumping pressure is not always fun.
Ever notice the crescendo of fireworks? Activity and momentum increase just before the Grand Finale. These are the times of excitement, anticipation, and good feelings. That is the time to sell the show because then comes the Grand Finale. You know what comes after the Grand Finale. Darkness. Everyone goes home, continues to work hard, and waits another year for the next big show.
Early in my M&A career a business owner told me, “You know, if it weren’t for customers and employees, this would be a really fun business.” There is some enduring truth to his sage remark. It’s hard enough to manage customers and employees during good times much less bad times when managers are scrambling for market share while firing employees.
Here is a suggestion directed toward owners. If you have been contemplating a sale, you probably don’t want to manage through another down cycle. Sell your horse before it dies. Take your cash. Allow somebody else to sign up and become the next boiled frog.

Charles Lemmon can be contacted by telephone at (214) 692-2748, ext. 106 or by E-mail at CVLemmon@CVLemmon.com.