Why an Entrepreneur’s First “Small” Exit Can Be So Meaningful

January 30, 2020

A friend forwarded me Jake Jorgovan’s post about why he couldn’t sell his company, Lead Cookie, and what he learned from the failure.

It’s a great post. And within it, Jake links to a Startup Therapy podcast about why a $250K exit can be life-changing for an entrepreneur. Creators Wil Schroter and Ryan Rutan talk about how selling your first company for that kind of sum is meaningful, even though the startup scene kind of poo-poos it in the face of multi-million-dollar exits that get a lot of media coverage.

I was interested in this podcast because I’ve experienced a not-multi-million-dollar-but-still-meaningful exit, when I sold my content marketing company to The Penny Hoarder in 2015. The podcast focused on how $250K is life-changing because it easily covers living expenses and provides financial freedom.

Absolutely. But the impact of that kind of sale goes way beyond financial freedom, so today I want to continue that conversation.

That first company sale is about more than money

Here’s what that first “small” exit can do for an entrepreneur.

1. It opens your eyes to what’s possible

Selling something you built from scratch for a substantial amount of money brings home the point that THIS IS POSSIBLE.

That you don’t have to work for someone else to make a good living, that you can do work you enjoy and build something meaningful and still support your family. That’s huge.

It’s also a big fat reminder that you can build a respected company while bootstrapping, and that raising millions of dollars, while hip, isn’t the only way to succeed.

2. It makes you realize what you’re worth

Once you make a good sum of money from something you built, your expectation of how much you should earn increases.

Some of this has to do with the financial freedom money provides, because it means you can take time to be thoughtful about how to bring in revenue the next time around. That’s a real privilege.

Once you know you can provide value that’s worth real money, you’re unlikely to go back to the land of undervaluing anything you sell, especially your time.

3. You learn about the process of an acquisition

The first time you go through the process of selling a business and transferring assets, there’s a lot to learn. Basics like how an acquisition works. Business terms that might not have mattered to you before. Financial concepts you previously might not have needed to understand.

You also learn about the pain points, what can be hard, what you should watch out for. As a result of going through this, you learn how to better set up a company for possible acquisition down the road.

Jake Jorgovan talks a lot about this piece in his post about Lead Cookie, details like separating revenue and expenses from other ventures so your financials are straight-forward.

If I was going to start a business I might one day sell, I’d make sure it had its own bank account, PayPal account, email inbox, newsletter account, etc. Maybe even its own LLC, although a DBA can work initially. 

Side note: For businesses I’m experimenting with but never plan to sell, like Retreat & Create, I don’t worry about separating everything out from my other ventures. Except for tracking expenses and revenue. While money might come in and out of a general business bank account, I attribute expenses and revenue to each of my ventures in QuickBooks, so I can easily see which projects have earned or lost money over time. That visibility is important for making decisions about each project.

I love the way Jake thinks about this; he writes in the Lead Cookie post that he has one set of books that’s for his personal brand that also serves as a “catch-all” for experimental projects. He writes: “That 3rd LLC is key to letting me be my crazy entrepreneurial self while still keeping my books clean. Any random income I get from side projects or new business ideas can be spun up in that LLC and then split off into separate ventures if they ever turn into anything.” 

All of these housekeeping details seem simple once you’ve sold a business, but the first time you build a company, you have to figure it all out. Once you’ve sold, you can look into the future and see what might be hard to untangle, and set up your next business the optimal way from the beginning.

In my case of an acqui-hire, I also learned what it was like to merge myself and my team into another company. For founders who step away after the sale, I could envision a learning curve around what it feels like to give up something you’ve built.

4. You look at the “rules” of selling with new perspective

If you educate yourself about acquisitions by reading online, you’ll find all sorts of rules about how much your company should be worth. Most of the popular formulas are based on a combination of metrics, including profit.

If this is your first exit and you expect to sell in the less-than-multi-million-dollars-but-still-meaningful range, throw all of those calculations out the window. 

(While I don’t have experience with a bigger exit, personally I’d apply this to that scenario, too.)

Here’s why. The only two metrics that truly matter in a sale are…

  • How much you need to earn to make the sale worth it for you, and
  • How much the buyer is willing to pay to make the acquisition worth it for them.

Yes, it’s really that simple.

While I’m careful not to share specifics around the acquisition of my content marketing company out of respect for the company that purchased us, I saw this play out again recently when a buyer wanted to purchase one of my web properties, The Write Life.

Traditional wisdom tells you a website should sell for a multiple of its profit. But The Write Life hasn’t been highly profitable over the last few years, for a few reasons: it’s always been a side project, I never relied on it for income, and — this is the biggie — we always prioritized growth and systems over profit. Whenever we earned money, I put it back into growing the site or outsourcing operations so I didn’t have to do it myself, rather than pocketing the money.

So if you looked at The Write Life from a profit-formula standpoint, it wasn’t worth much. But when it came to negotiating a sale, that didn’t matter. What mattered was what it was worth to me, and what it was worth to the potential buyer. For both of us, that number was way higher than any formula, because the site has a big readership and is a trusted brand.

In the end, I decided not to sell the site because I don’t feel finished with it. But this experience reminded me that the guidelines around selling any company are just that: guidelines. Don’t rely on them if you think you can do better. 

5. It helps you understand the importance of systems

If you’ve sold a business, you’ve managed to figure out how to get it to run without you or at least get most pieces to run without you. 

This can be a hard concept to grasp when you first set out to grow a company. But once you see systems and processes in action, you’ll never again be able to grow a business without them. 

The book Built to Sell is a helpful resource on this topic.

6. It sets you up for a bigger exit next time — if you want it

The first time you grow and sell, you learn. Then next time you build a company, you can move more quickly, and in all likelihood, create something even better. 

You won’t make the same mistakes twice. For your next venture, you’ll set it up the right way to begin with, and you’ll take the most efficient route to profitability.

Of course, you’ll probably face new challenges the second time around, especially because most entrepreneurs don’t want to build the same business twice. 

You’ll want a new challenge, so you’ll do something slightly different or maybe even completely different. Hopefully it still leverages some of your skills, but you’ll face new obstacles you didn’t face the first time and feel like a beginner all over again.

7. You’ll move one step closer to figuring out what you want

While going bigger and faster with the next company is possible, it’s optional. And it might not be what you want.

I’d love to sell another company someday. But I have no desire to work toward one of those multi-million-dollar exits. That’s just not me. I don’t want to run a huge company. I prefer to work with a small team, so I can have less stress and more fun. 

My goal is to hit that sweet spot of work I love doing that provides high value for others and high income for my family. It’s a unicorn of a trifecta: Enjoyment + Value + Money. 

But circling back to No. 1… it’s possible. My expectations are high, and that’s right where I like them.

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