Note: This is part 1 of a 2 part series. The conclusion is here.
“If I panic, everyone else panics.”
– Kobe Bryant
“The trouble with the rat race is that even if you win, you’re still a rat”
– Lilly Tomlin
Entrepreneurs are risk takers.
However, at their core, most of them are risk-averse.
They take a calculated risk in starting up a company. They see a need and they create a business to fulfill that need.
At least, that’s what the smart ones do.
Even then, there’s a large portion of luck that influences whether or not you’ll succeed as an entrepreneur. It’s possible to do everything right and still fail. 50% of companies that start are shut down within 5 years. Many more of them are zombie companies, alive only because their owners still continue to fund them or throwing off just enough money to provide their owners with a meager salary.
Then, there are the exceptions to the trend. There are the startups that grow into larger, sustainable organizations. 1 in 50 startups eventually gets bought, for an average price of around $100,000.
Seven years after starting up our software development company, we’d grown into a sustainable and growing company. It took us a while to find our identity. We had to survive a downturn, and in the teeth of the Great Recession, we had a fairly decent-sized double digit compound annual growth rate.
Then, one day, I was at a conference trying to expand our customer base into a new vertical. I was walking through the exhibit hall when a person at one of the booths called out to me.
He knew who I was and who my company was, but I didn’t know him. Actually, it turned out that I did know who his company was, but I didn’t make the connection at the time.
I was pleasantly surprised. Someone seemingly randomly flagged me down.
Pretty soon, we were having a detailed discussion about our companies, and he raised a question that, to me, seemed to come out of the blue.
Would you be interested in selling your company?
I had never thought about the topic in much detail before. It was always this esoteric, hand-waving notion that one day might happen. But certainly not that evening.
My answer came straight off the cuff. Thank goodness for all of those impromptu speech competitions with the West Point speech team.
My house is not for sale, but if Bill Gates drove by and handed me a certified check for ten million dollars, it would be for sale.
To paraphrase the famous wrestler Ted “the Million Dollar Man” DiBiase, everyone has a price.
About a month and a few briefings later, we had NDAs and a letter of intent in place to talk deeper mechanics, and, just as importantly, numbers.
Those numbers would be the basis to arrive at an offer.
The offer was right at fair value, but had a sizeable earnout component. That was to be expected, as we’d just shifted our focus a little over a year prior and didn’t have much of a track record to support our assertions of future revenues and profits.
I had provided projections I was reasonably certain we’d hit, but without much padding of the numbers or sandbagging to exceed targets. I figured our range was what I’d projected plus or minus 20%.
If we could hit our numbers, then our company would be worth two to three times the valuation at the time within three years. I was reasonably optimistic that we’d hit those numbers.
But I wasn’t sure.
The offer on the table was nothing to sneeze at. It would provide me with financial independence while still keeping a piece of the action from the acquiring company.
My partner, though, wasn’t convinced. He was more confident on the upside than I was. It made sense. As the thought leader of the company, he saw where the market was going and probably, by that time, had better insight into the future than I did.
It came down to the fact that I wanted to sell and he wasn’t ready, at least, not at the price that we were being quoted.
To avoid a deadlock, he made me an offer: he’d buy me down to a minority share for about a 15% premium to the offer that we had on the table. The amount was due in 36 installments.
What Would You Do?
Since I can’t disclose the terms of the offer, I’ll obfuscate it a little and put it in terms of the average American.
The median household income in the United States in 2018 was $61,937. 50% of American households earn less than that amount and 50% earn more than that amount. Assuming that this household saves the SAFEMIN amount, their expenses are $42,833.14 per year.
At the time I received the offer, I was 38 years old. Based on earnings history and scaled to the average American median salary, both my wife and I would earn about $750 a month in Social Security at age 66 if we were to quit at age 40.
We see that the average American’s target retirement number once the buyout term was done (age 40).
Let’s assume that inflation has been 3% since we started working at age 22 and we received a 7.5% return on our investments every year. By age 38, we’d have $224,524.80 saved up, meaning that we’d be $1.174 million short of the target number.
I figured there was about a 60% chance that the company would continue to grow, a 30% chance that it would stay the same or grow with the rate of inflation – meaning no real increase in the value of the company – and a 10% chance that it would head downhill and lose value, potentially eventually needing to be wound up.
What number would it take for you to accept the offer? Would you be willing to take less than the amount needed to get to your target number, such as enough to fund your apocalypse fund? Would you need more because you’d want to expand your lifestyle? Would you let it ride because of the likelihood of growth over the next few years?
Tell us what you think in the comments below!
You can find out what I did by clicking here.
- John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.
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