It may happen when your business is worth $1 million. Perhaps it will happen at $5 or $10 million.
But eventually, it happens to just about all founders.
You realize that your business has become an asset. That awareness alone can be destabilizing for some. The thought that something you created from scratch has value to someone else may seem strange. You may experience a form of imposter syndrome as you question how it is possible that someone would be willing to pay six, seven, or even eight figures for something that was little more than an idea in your head at one point.
If you get over that shock, it’s common to start believing—perhaps even acting—like you are wealthy. Thoughts of trading up your car or house may fill your mind. The premium to fly business class may even seem a little less extravagant. A four-star hotel stay becomes five.
Soon after this mental upgrade, you may experience another emotion, which is the thought that this new lifestyle upgrade is contingent on turning theoretical wealth into real money. If your business has become a significant share of your wealth, you may feel a sense of urgency to diversify.
And at this point, a wedge may form between you and the managers you’ve hired to help run your business.
It can be effective to treat your management team as peers and make decisions together. You may tell them, “We’re all in this together,” but when it comes to the decision about when to sell your business, your incentives may become misaligned.
While your managers may have options or shares, their stock in your company is likely a much smaller part of their wealth.
Let’s use a hypothetical example. Imagine Rahim owns 90% of Acme Inc., a business worth $5 million. Rahim started his company from scratch. Along the way, he’s been tempted to pay himself a dividend, but not wanting to starve his business of cash, Rahim has left most of his profits in the company. Therefore, his net worth looks like this:
90% of Acme’s shares: $4,500,000
Home equity: $360,000
Stocks & bonds: $300,000
Net worth: $5,160,000
Percentage of wealth in Acme shares: 87%
The remaining 10% of Acme is owned by Jane, Rahim’s general manager. Jane receives most of her compensation from a salary and an annual performance incentive program. She’s been successful in her role, so always earns a good bonus which she has salted away in stocks. Jane’s wealth picture looks like this:
10% of Acme’s shares: $500,000
Home equity: $560,000
Net worth: $1,740,000
Percentage of wealth in Acme shares: 29%
Notice that on paper, Rahim is far wealthier than Jane. However, much of Rahim’s wealth is in Acme shares. Jane is profiting well from the situation, enjoys her job, and is rewarded fairly for the contribution she makes. Given Acme’s growth trajectory, she doesn’t understand why Rahim would want to sell.
But Rahim feels as if he is living a double life: He’s wealthy in some eyes, but he knows how precarious his stature is.
When You Outgrow Your Own Business
For a real-life example, look at the instance of Needham-based Robert Glazer, who started a marketing agency called Acceleration Partners in 2007. As he revealed in a recent episode of Built to Sell Radio, Glazer grew his business by regularly reinvesting profits, and over 14 years, he built Acceleration Partners to more than $28 million in revenue. To smooth out the inevitable cash flow ebbs in a service business, Glazer had a $2 million line of credit secured against his personal assets, including his home, and a $500,000 equity line on his home as a backstop for the business. At one point, that was over a year of cushion.
Along the way, Glazer built a management team and incentivized them with phantom stock. Glazer paid his managers well, and they earned annual bonuses for hitting targets.
As the business grew and gained traction, Glazer began to entertain casual inbound discussions with potential investors and acquirers.
Then COVID hit.
Like most businesses, Acceleration Partners took a major hit in the weeks after March 2020. Clients faced with plummeting demand suddenly canceled or paused their contracts, the sales pipeline dried up, and several large customers declared that they were unilaterally extending payments to 90-180 days from 30 days.
After a few months, the business stabilized and eventually started growing again, but Glazer was forever changed by the experience. His team was ready to start investing for growth, but he was reticent to continue down the same path of profit reinvestment.
What he realized was that he had outgrown his ability to own and finance his own company. Glazer’s payroll was more than $1.5 million per month. That $2.5 million in emergency credit would no longer last a year, and it might not even last for a few months. A bad quarter or two could have wiped out the personal wealth Glazer had created outside of his company, potentially putting his family at risk and destroying much of the value in his business.
Even though he might be considered wealthy on paper, Glazer didn’t feel like it. In the end, Glazer decided to sell a majority stake in Acceleration Partners in 2020 to diversify his financial risk and bring on a partner to help the company meet its aggressive growth targets. Glazer’s management team was supportive of his decision but couldn’t possibly have understood what it felt like for Glazer to be personally backstopping a business that made up such a significant chunk of his wealth.
It’s great to build a management team. You should feel the bond that comes from working toward a common goal. You may even choose to incentivize them with stock, but if your business is the lion’s share of your wealth, you will always be slightly misaligned with your executive team. That’s why you—and you alone—should decide when it’s time to sell.