Many people are selling their businesses now, and it can make sense for those with the right strategy. While the industry may jump on this bandwagon, no one says, “Hold on, maybe don’t sell yet.”
Selling sounds sexy, but after sellers pay taxes and pay off debt, what they have left at the end surprises some people.
Here is an alternative scenario where you can become prosperous by keeping your business. Take a note from Warren Buffett of Berkshire Hathaway fame: He buys and keeps businesses.
Why does he do that? Because he understands the value of good management and compound interest. This strategy has made him among the richest people in the world.
Buffett started investing at the young age of 14 and keeps investing into his 90s. His 22 percent return on investment compounded over decades has made him billions.
You have an advantage
Your returns are higher than 22 percent per year. The industry average — according to my studies — is about 50 percent (return on balance sheet equity). For some of you, including my top clients, you can achieve a 100 percent annual return.
When you sell your business, what will you do with the proceeds? You may buy real estate, invest in stocks or buy another business. You may do great, get average returns or your new venture may flop.
Nothing is guaranteed.
But if you hired a professional management team for your landscape firm and continued to grow it steadily, including buying other companies if the right opportunity presented itself, your returns could be far greater than you can make by selling today.
It’s still risky, but it’s the devil you know.
Do the math
If you could achieve a 50 percent annual return compounded over 10 more years, you would have one heck of a return.
Of course, it’s not easy whatsoever to achieve that return, but you also don’t have to rely on your own brain power.
You can hire people smarter than you. And if you don’t know how to hire these smarter people, then you can hire specialists to help you recruit and hire. (Email me for my source.)
It’s easy math, which is why private equity players and others want to buy landscaping businesses like yours. Investors know if they pay a multiple of, for example, three to six times your earnings before interest, depreciation, tax and amortization (known as EBIDTA) and if they buy, for example, up to 10 companies your size, they can then consolidate those businesses into one and ultimately sell it for a higher multiple, possibly eight or 10 times — or even higher.
Maximize returns
I have helped owners set up their companies to sell, and they are happy with the outcome. Some have been able to get a second bite of the apple. When the private equity sells the larger platform business, the original seller gets a second payment of the enhanced value.
But is that the best way to maximize your return?
If you take on the challenge of building your leadership team and scaling your business profitably, you can do quite well, earn a healthy cash flow and build an even more salable business.
If you need advice on growing your business and leadership team, reach out. And if you want to become a modern-day Warren “the landscaper” Buffett, follow my words.
Having said all that, are there still reasons to sell your business? Sure. It’s a way to gain liquidity and support, and it can help you balance out family needs and achieve other life plans. But it’s not the only scenario for building wealth.
Next month: Look for a follow-up article that explains what it means to build a business that can run itself so that you can retire in place.