Selling your firm may hike your pay

Selling Your Firm May Hike Your Pay Are you paying for the privilege of working? Is running a business, even a profitable one, costing you money? No successful entrepreneur wants to think that, but there is occasionally some value in thinking the unthinkable.

If your calculations show that sellin your company and investing the proceeds would bring you a return that exceeds your current salary and dividends, then you probably should at least entertain the possibility.

Assume, for example, that entrepreneur Smith pays himself $125,000 a year for running his company. A tidy income, but could it be more? If Smith sold the firm for a profit of $5.8 million, he would clear--after paying Uncle Sam a 33 percent tax on the gain--a lump sum of $3,886,000. Because Smith is a conservative investor, he puts all the money into two-year certificates of deposit yielding 8.5 percent, for an annual return of $330,310. By selling his business, Smith would more than double his income.

Put another way, holding on to the company is costing Smith over $200,000 a year. Clearly, he is a prime candidate to sell. Yet he may not do so.

"All too often, entrepreneurs stay at the party too long," says David Hoods, a divisional president of California-based Geneva Corp., investment bankers for small and midsized companies. "They feel that by selling the business they built or founded, they'll be giving up something precious. True, but there's something else to consider. By failing to sell the business when it can fetch a good price, they may be missing out on an opportunity that won't soon repeat itself. If ever!"

How does this happen? Why do smart and sophisticated entrepreneurs let such opportunities slip by? "Because they get lulled into a state of dangerous complacency," Hoods says. "Typically, the entrepreneur says to himself, 'Hey, I'm doing great. For running this business, I'm earning a hefty salary.' Hefty? Perhaps. But compared to what?" He cites an example of an entrepreneur who "could sell his electronics-distributing business for $10.5 million, investing the after-tax proceeds for an annual income of $595,000 [based on 8.5 percent]. Suddenly his $300,000 salary doesn't look quite so hefty anymore."

Owners may choose to sell out for defensive reasons as well. After transforming Continental Custom Bridge Co., in Alexandria, Minn., from a shaky, five-person start-up into a $10-million-a-year company with more than 100 employees, entrepreneur Bruce Pohlig decided to explore the market for his company.

"As a business builder who's been successful in achieving your objectives, you wonder when and if the bubble will burst," Pohlig says. "Because you never know the answer to that, and because you can suffer a reversal at any time, I decided it would be prudent to cash in some of my chips and to salt the money away. Although my company had been very successful to that point, I knew that businesses go down a lot faster than they go up."

"Amen," says Robert Huber, a partner with the accounting and consulting firm of Price Waterhouse. "Picking the perfect time to sell a business--that takes the kind of crystal ball few of us have," he says. "But if you fail to cash in when your company or industry is at its peak, you may find that the chance has passed you by for good."

To protect assets, Metz Metallurgical, in South Plainfield, N.J., was sold after more than 65 years of family ownership, says Michael Metz, the firm's executive vice president and chief operating officer. "Soon after the Union Carbide disaster in Bhopal, India, the insurance company that underwrote our air-pollution impairment coverage refused to renew our policy," Metz says. "It was an industry-wide problem. Companies like ours that work with chemicals in the manufacturing process couldn't get coverage. If our plants accidentally discharged pollutants into the environment, and we were sued for it, we'd be directly liable."

Considering the nationwide trend toward high jury awards, the risk of going it alone was too great for a small, privately held company. With this in mind, the Metz family sold out to Degussa Corp., a U.S. subsidiary of Degussa A.G., a $7-billion-a-year West German company. "The insurance problem made us sensitive to the fact that virtually all of the family's assets were tied up in the business," Metz says. "In the environment of the mad 1980s, that was no longer prudent. Selling out enabled us to cash in on more than half a century of family ownership and to diversify our assets for safety and growth. It's proven to be the best of both worlds. We've gained liquidity and have stayed on to manage the business for Degussa."

But if you don't have a clear signal about what to do, how will you know if you're at a peak? One way, says Hoods, is to look at the market itself. Investors are walking around with a sizable cash board these days, so a successful small business will probably bring a good price. "The lending sources are very aggressive and creative, and they are eager to provide the funds to make acquisitions," he says. "It is very much a seller's market today."

Is selling out right for you? Will you find it to be "the best of both worlds?" The answer depends largely on the company's value and on your ability to invest and live off the proceeds of a sale.

For help in assessing the value of your company, you will need to turn to accountants, valuation consultants, and investment bankers. That's the first step in making the decision. You also will need to assess your own feelings about giving up your company: some entrepreneurs feel they lose their identity if they sell. The value of cash investments can fluctuate over time; after all, someone who wants to buy your company obviously feels the investment will pay off. If you think you can take it to new heights, you are not a candidate for cashing in.

But you may be, and it might be good to think the unthinkable while you have plenty of time to make a considered decision.

COPYRIGHT 1989 U.S. Chamber of Commerce
COPYRIGHT 2004 Gale Group