Today I’d like to talk to you about when to sell a fast-growing brand. I get asked this quite a lot and to be honest, there’s not really a right or wrong answer for this. It’s really a personal choice. But what I can help you with is a couple of ideas, a couple of concepts to think about before selling your fast-growing brand.
Target Price or Goal
Come up with a target and a goal for why you even built this business. Oftentimes when I’m talking to people, they say “I have a number in mind and that’s what I’m shooting for”. That could be one way to do this. The other thing is to think about is exactly what you have built up, how long have you been working on this project and what would it take to make you happy with that result? So, start there.
The next crucial issue is timing. A lot of times when I speak to people I see financials of fast-growing businesses and it’s just not an ideal time to sell on the open market, even though there is fast growth. I want to talk to you a little bit about the four year rule and what I’m seeing with brands, especially with brands that have started on Amazon. We see this over and over again.
Typically the first year you’re in business, when you get started with launching your brand on Amazon, you’re just trying to figure out what products are selling well, so you do research, you go and source some products, you throw it up there and see what happens. Even if all the numbers match, you don’t always think, “Yes, I’m hell yeah about this niche.” It doesn’t always hit, so you really need to figure out what works in that first year.
The second year is often when you double down on what’s working. So you’ve found a niche, you’ve found a product line, found a product that solves a real problem for a target market, and then you double down on that.
In year three you really want to scale this up. Even in one year or maybe in year three, you’re really scaling this up, so you’re putting everything you make, every offer of free cash and bringing in more capital to really blow this thing up and get it as big as possible and that’s probably where you’re at right now. You’re fast growing because you’ve been reinvesting in the business. You’re doing product launches. If you looked at your income statement, your profit and loss, the net margin would probably be pretty low because you’re putting everything back into the business.
To optimize for a sale, you want high net margin. That’s an opposing force, if you will, when you’re going to focus on growth versus focus on selling. You might be wondering if there is way to sell while still focusing on growth. There are a couple ways to do this:
Taking on a Partner
One of the most popular ways is growth capital. You can take on a partner to sell a piece of your business to at today’s value, which won’t be optimized for sale, but that capital partner can come in, take a minority equal majority share of the business and pay for that today, so you take some risk off the table. They’ll put in some capital to the business. If they’re strategic, they’ll even help you with how to scale the business, but they’ll also give you access to more capital at a rate, right? So you can then lean on that partner to bring in more capital and even some more expertise to grow the business faster.
A really great time to do this is when you look at your whole brand, your whole business, the trajectory, and you say “Yes, this is growing and I know that if I put more capital into this, I know exactly what I would do with this capital.” That’s a time to get a capital partner on board potentially as opposed to selling. So you don’t need to optimize for the sale … You basically need to optimize for what you’d do with more cash. You’re selling the story of what the future growth is. And in some cases, a capital partner will want to sell in three, five years from now. If you sell, say 50% of your business today at today’s value, then you’ve still got 50% of the business to go sell in three to five years and you could build a much bigger business in that time.
In the private equity space, this is called the second bite of the apple. You sell a bit today and you keep a piece for the next sale and sometimes people do this three or four times over, because the business wants, as it’s growing, will be acquired more and more.
Buying out a partner vs selling
You could also look at buying out your partner. In some cases, in a fast-growing brand, when you have partners involved (one or more partners), one partner will typically want to keep growing the brand. Another partner may want to take out more cash so that they can enjoy some of these profits. Another partner may be undecided. If both of you or all of the partners want to sell the business, then optimize for sale.
Sometimes however, if you’re the one that either wants to sell or grow the brand, you could look at buying that partner out. If you’re the one wanting to sell, you could look at what the market rate of the business is today and sell that to your partner and vice versa. Again, you could get on a capital partner. You can take on investors to help you buy out your partner or you could raise that capital elsewhere.
Other Business Interests
Another time to sell a fast-growing brand is when you have another business that you’re more interested in or that business is already larger than the brand that you’ll already working on.
It may be another brand or maybe another business completely. That could be a time to sell the business. Keep in mind that if you don’t need to sell today, it’s always better to optimize for a sale. And when you’re in a fast-growing brand situation, you definitely want to try and optimize for net margin if at all possible.
Retiring or Health Issues
We all get older and sometimes you’re wanting to retire. This might be another time to sell.
That may be because of age or because you’ve hit a time in your life where you think, “Okay, I’m done with this. I want to sell, I want to take this cash and I want to move to a beach.” That’s fine too. Sometimes health issues come up and unfortunately, we’re not superhuman. Sometimes a health issue can really change your focus and you may need to sell the brand. It’s a good idea to keep your business in a position to be sold as you’re moving along and as you’re growing. Move towards the business being able to run without you so that if anything happens to you, the business could potentially continue to run and/or sold in a shorter amount of time.
Business is Optimized for Sale
Another time to sell a fast-growing brand is when you’ve actually optimized for net margin already. It’s rare, but we do actually see businesses that are in high growth mode, but also have high margin. This is typically when the brand itself really is positioned well in the market. They have huge margins because they’re the only one that feeds the niche. It’s proprietary. It’s patented. They’ve solved the problem better than someone else. They have unique sales channels and a brand that people love.
If people are searching for your brand, they’re paying more than the next product because they believe in your story, your brand story. That’s a great time to sell a brand like this.
Tax Planning for Sale
Tax planning is a boring topic that you really want to and have to look at. Talk to an accountant about your financial situation. It’s never a good idea to just sell a business. You really want to do some tax planning in your own jurisdiction and figure out what your actual net would be. You should not only keep in mind the broker’s fees, escrow or legal fees, but also what do you actually have left over at the end of the day to go back to that first point of the goal, right?
If your goal is $10 million, how much of that $10 million would you actually keep if you were to sell the business today? You may find that doing some tax planning ahead of time while still growing the brand is probably a better option. It’ll give you more cash, higher sale price, and you’ll actually be able to keep more of the cash aswell.