When to Sell Your Business — Before It's Too Late

As a founding entrepreneur, it is hard not to always be "in love" with "your baby". You created something from nothing, you nurtured it along the way, and you built something really great. Until the point "your baby" stops growing, your profitability falls with increased competition, and the roller coaster starts picking up speed in the wrong direction, with revenues going down, not up as before.

It is very easy to want to "stay the course" and hope for things to get better in the future. Depending on the root cause of the fall, like a temporary decline in the economy, it very well could rebound. But, there are times when the root cause cannot be fixed, or worse yet, will continue to "snowball" in the wrong direction.

In those scenarios, you need to know when to pull the "ripcord" to save whatever value you have left before your business is worth zero. This post will help you identify what to look for and how to get you and your shareholders a "soft landing" when things start to turn south.

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A case study on Joe's Bikes

Meet Joe's Bikes, a fictional ecommerce seller of electronic bikes ("eBikes"). They were one of the first movers to be marketing eBikes online, launching their website in 2018, and were experiencing meteoric growth in the first several years that followed, growing their revenues from $0 to $20MM by 2022. But soon after that point, they were seeing a lot more competition from other eBike sellers online, and the effectiveness of their Google advertising was getting a lot worse.

Their profits, which had peaked at $2MM in 2022, had quickly fallen to $1MM in 2023 with the increased advertising costs to break through the clutter of additional competitors online.

But then Joe noticed something really strange started happening in 2024; he saw his cost per click starting to double in Google, which meant his cost of customer acquisition was going to double. And he saw his number of clicks from Google starting to cut in half, largely due to the invent of artificial intelligence engines like ChatGPT (taking traffic away from Google) and Google itself redesigning their pages to give their own A.I. results more promotion at the top of the search results (at the expense of the traditional search links at the bottom of the page).

The doubling of the cost per click meant his profits were going to slowly head to $0 on his current level of revenues, and the halving of his traffic meant his revenues would most likely be cut in half from $20MM to $10MM over the next year, which suggested huge losses were in his future. It wasn't yet visible in his financial statements in 2023, but he knew the storm was coming in his 2024 projections.

If this case study sounds familiar, it should, as most ecommerce companies in most product categories were living some form of the above during their own growth curves over the last couple of years. Now, what do we do about it?

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What are Joe's options?

Option 1: Ride Out The Storm. Joe could do nothing and simply "hope" for his advertising struggles to improve. But unless there were new marketing channels for Joe to pursue (e.g., distribution of his eBikes through retailers like Dick's Sporting Goods), his ad metrics may never improve if he only stayed focused on search advertising. You should never make business decisions with the word "hope" involved, so this path does not make sense.

Option 2: Restructure His Business. Maybe Joe is fine watching his revenues fall from $20MM to $10MM, as long as he can think of a way to cut his expenses so that projected losses could become a small profit to afford his lifestyle. But we are talking about a lot of cuts here (around 70%) for Joe to hit his goal. And that does not sound like a reasonable path forward either.

Option 3. Sell The Business: Why You Still Can. Yes, Joe could have sold a year earlier for $10MM (5x his $2MM in profits at the time). But that is water under the bridge at this point, and he should not be chasing that number. He still can sell today for $5MM (5x his $1MM in profits reported in the prior year that just closed).

Which would be $5MM more than the $0 he would get next year, if profits are truly on their way towards big losses. Assuming Joe can move quickly to find a buyer and get them to closing, this is the best path forward. But the longer he takes to get to the finish line, the lower the odds this path will work, as the profits start to fall in the coming months' financial reports. Joe must move at light speed here.

What will Joe do?

If Joe is a sole owner, the path that Joe should pursue is a personal decision, based on his personal goals. But if Joe has shareholders, he must protect their interests, and in this case, selling now before it is too late, will at least get his investors an exit at a reasonable valuation that would yield them a nice return on their investment.

He should take that "win", which his investors would appreciate and be willing to back him again on his next venture. Because if Joe doesn't sell now, and let's revenues and profits fall, resulting in a terrible trend line, they will never be able to sell, and his investors will lose all their money invested, and more importantly, their faith in Joe.

How to create leading indicators for your business

Joe was fortunate that he set metrics for himself to predict the future health of his business. Most entrepreneurs live in the present and simply track their success and make decisions based on historical results. You need to figure out how you can predict where your business is heading, to learn the bad news that may be coming your way, before it actually hits your business, so you have time to respond and take the necessary actions ahead of time.

In Joe's case, his leading indicator was clicks and cost per click from his Google campaign, which he could track in "real time". The minute he saw those heading in the wrong direction, he knew it was time to take action. Remember, a buyer of your business is studying historical financials, which still look good for this business. Only Joe knew of the future storm that was coming his way. You need to figure out which leading indicators will be the ones that will save your business from a looming storm, with time to sail to shelter while you still can.

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Closing thoughts

So, a couple of closing thoughts here. First, stop chasing historical peak valuations that may never be achieved again. A bird in the hand is always worth more than waiting for two in the bush, especially if you feel the business is heading in a downward direction.

And second, make sure you have leading indicators in place that will enable you to quickly pull your "ripcord" with enough time to get you a "soft landing". Otherwise, prepare to crash and burn, entirely wiping out your equity value and reputation with investors in the process.