Many entrepreneurs and their investors start developing an exit strategy almost from the beginning, perhaps through an acquisition, a merger, a public offering, or by some other exit vehicle. Most investors won’t even consider investing in a company before they have a plan to exit at some point in time. And for the entrepreneur “FIRE”, Financial Independence, Retire Early, is an acronym for what sounds like an appealing and widely held goal. However, as discussed in another essay (Why Become an Entrepreneur), money is only an incentive, not the entrepreneur’s primary source of motivation. What motivates an entrepreneur is the pursuit of their own individual, creative passions. How does the entrepreneur’s selling their business continue to satisfy this motivational need? And is selling their business even a sufficient financial incentive for an entrepreneur? Finally, if they do sell, what do they do next to lead a productive, happy life? These are the questions this essay will address.
“My philosophy, in essence, is the concept of man as a heroic being .… with productive achievement as his noblest activity.”
Ayn Rand
As pertains to the financial incentive to sell their business, let’s begin by considering whether in fact it is financially advantageous for the entrepreneur to sell it? A business, from a purely financial perspective, is nothing more than a money-making-machine (Valuation) whose present value is determined from projected profits over time. For the entrepreneur this means it represents an “active” investment, as they are actively involved in producing those profits. Selling their business does nothing more than convert that active investment into cash. But this leaves the entrepreneur with a new problem, what to do with the cash? They may spend some of it by rewarding them self through consumption, buying a bigger house, a better car, purchasing luxury goods, or taking an extended vacation. All well and good, and justly deserved, but most of that cash will have to be reinvested in “passive” investments, such as stocks and bonds or other financial investments, to provide a new source of income.
Effectively this means, when the entrepreneur “cashes out”, by selling their business, they have sold an active investment, their business, that they have in depth knowledge of, full control over, and with a presumably high rate of return, in exchange for passive investments they usually have far less knowledge of, little control over and most likely a far lower rate of return. Is this really advantageous? Some claim it provides security and reduces risk. But even these ideas are somewhat questionable. They may have proven they are a brilliant, successful entrepreneur; but will they be an equally brilliant successful financial investor? No entrepreneur understands the value of other businesses they invest in as well as their own. In fact they may know little or nothing about them, and certainly have no control over them. As Warren Buffet says “Never invest in a business you cannot understand”. It is why I claim there is often little financial incentive to sell a business, because the entrepreneur already has all the money it is worth. They are simply exchanging the active income from future profits from their business for passive income through investments over time.
“The best investment you can make, is an investment in yourself… The more you learn, the more you’ll earn.” Warren Buffet
Warren Buffett
Still, it is possible an entrepreneur may be forced to sell their business when investors demand it. For investors the incentive and motivation for selling a business they are invested in may be quite different from the entrepreneurs (Investor Incentives and Motivations). Investors in general, venture capitalists in particular, have an incentive to sell a business when it has gained its maximum value relative to the investment they have made, a maximum return on investment (ROI). Once a maximum ROI has been achieved their incentive is to free that capital to invest in other ventures. If the investors have a controlling interest in the business, which often they do, they will drag the entrepreneur along with them by forcing its sale. This is the price entrepreneurs often pay when bringing investors into their business; and one reason I forewarn entrepreneurs to consider this loss of control seriously before bringing investors on board.
However, this may prove an added financial benefit to the entrepreneur if, as discussed in the essay Valuation, the company is sold through an acquisition or an IPO at a premium over their NPV valuation. An acquirer may be willing to pay this premium, as buying the company may provide them jumps ahead in a market they believe and/or are better able to capitalize on. And if the company is sold to the public through and IPO this may also result in a premium value higher than the company’s NPV valuation. Both represent potential additional financial incentives for an entrepreneur when their business is sold, which may make it worthwhile. Whatever the final value a company is sold for, it still leaves the entrepreneur facing the same question of what to do with the cash. And it doesn’t solve the potential problem of motivation loss for the entrepreneur.
“Money is only a tool. It will take you where you wish, but it will not replace you as the driver.”
Ayn Rand
This brings us now to discussions beyond financial incentives, the motivation for an entrepreneur to sell their company, or not? Just as money was only an incentive, but not their primary motivation for starting a business, so the same applies for selling their business. If the entrepreneur’s full realization of their vision for a product or service has not been completed, or if the entrepreneur has a vision for additional products and services they wish the company to pursue that continues to motivate them, the question they need to ask them self is, do the financial incentives to sell their business outweigh their motivation to continue with it? For many successful entrepreneurs the answer was no. Steve Jobs did not exit Apple after inventing the Apple II? Bill Gates did not exit Microsoft after MSDOS? Even though they both became multi-millionaires when those early product developments were a success, they had much greater ambitions to pursue. Even after their companies were sold through IPOs they did not exit their companies but rather continued on as CEO’s to produce some of the greatest products the world has ever known. There is only one reason for this, productive achievement motivated them; it continued to give them purpose.
Different from Steve Jobs and Bill Gates, however, for many entrepreneurs continuing on as CEO of a company once it has been sold may not be the kind of work that is fulfilling for them. All businesses evolve through stages from startup to growth, steady state and then eventually may even decline. Even Bill Gates eventually retired as CEO of Microsoft to pursue other interests and passions. As such, few entrepreneurs have neither the interest nor the ability to remain as the CEO through all these stages. This does not motivate them; it does not give them enough purpose.
“The worst thing in life is to have no purpose.”
Ayn Rand
Does this mean their only option is to take the cash, retire, and pursue personal hobbies and interests, living a life of excess and leisure? This may appeal to some, especially an older entrepreneur at the end of their productive life. Many do, but many do not. Warren Buffet, the oldest CEO of a Fortune 500 company at 92 in 2022, would claim retiring at any age is not a good idea. Instead of retiring to the “good life” many entrepreneurs that sell one company are motivated to continue on as a serial entrepreneur starting another venture in pursuit of a new vision. But, if the challenge of starting a new venture is not something they desire, they may find purpose as an angel venture capitalist or mentor, guiding new entrepreneurs in their ventures. Ultimately, there is only one reason an entrepreneur ever decides to sell their company; because they are motivated to use the cash to do something more productive with it that gives them more purpose.
“If a man values productive work, his happiness is the measure of his success in the service of his life.”
Ayn Rand
For an Objectivist entrepreneur, whatever the reason they decide to exit their business, it will require the application of all the philosophical and moral principles discussed in previous essays. Are the incentives and motivations for the investors the same as they are for them (Investor Incentives and Motivations)? Will the negotiations be conducted without compromise (See essay: Compromise vs Negotiation) based on an objective assessment of value (Valuation) negotiated with honesty and integrity (Honesty and Integrity). Just as the principles of Individualism guided their success so it guides their decision to sell it. Individualism (Individualism vs Altruism) demands the entrepreneur ultimately answer only one question when deciding whether to sell their business, what is in their rational best interest? What will be more productive, give them more purpose, make them most happy?
“To live, man must hold three things as the supreme and ruling values of his life: Reason—Purpose—Self-esteem. Reason, as his only tool of knowledge—Purpose, as his choice of the happiness which that tool must proceed to achieve—Self-esteem, as his inviolate certainty that his mind is competent to think and his person is worthy of happiness, which means: is worthy of living.”
Ayn Rand