Windfall? What's Next After Selling?
Windfall? What's Next After Selling?
You’re lucky enough to come into serious cash. Dollars on dollars. You may have sold a business or inherited a trust fund. Whether it’s $3m or $300m, a shift happens. This shift happened to our guest on After The Exit Pod.
Our guest worked for the government cracking codes. You heard me, stuff you see in movies.
After working on his IT-based security business for 5yrs, the company was acquired for 8 figures.
I keep guests anonymous so they can share a lot of personal information. I’m going to name our guest, “John” for easy storytelling.
Here’s what we learned:
Post Acquisition Life
How did it feel when the wire transfer hit?
Did you buy a Ferrari? “No, no Ferrari, my wife and I spent time together while I refreshed my bank account over and over. It was definitely surreal though.”
My best advice? Do something nice to make the moment memorable in your life beyond a business transaction. Go on a trip, buy a watch, or whatever gives you fulfillment.
Are you trying to find cash flow opportunities?
Yeah, John’s always looking. “Even if it’s a small amount, it’s nice to have income.”
This is such an interesting psychological aspect. “Even if it’s a small amount of cash, it feels good to see that coming in.”
There’s absolutely a natural fulfillment of income, as it’s hard to quantify and get consistent stimulus from net worth.
Are you satisfied with your net worth?
“I am,” said John.
I do think there are two parts to this question. I only asked him about net worth. But there’s absolutely a cash flow/income part that he’s seeking and I understand it.
I personally thought I would be satisfied. After moving to a higher cost-of-living city, and letting monthly expenses naturally increase, I started to fantasize about more.
I’m satisfied though, I think.
The real question is, do you have the willpower, and desire to reduce work/life balance and go back in for more? Are you ready to devote everything to the business again? I’m personally not, at least for now.
Thoughts on earnouts?
Here’s another “be careful” moment.
You want to be fully aligned with the buyer. Imagine you need to hit growth targets to receive your earnout. But the buyer doesn’t want to make the same investments you would. Now what.
Lastly, are you okay with having a boss now? Are you mentally prepared to run the company still? Is the earnout financially worth it based on the lifestyle you want? John didn’t want a boss, so he negotiated that into the purchase agreement.
What to do with your time after selling the business?
I must say, this one’s difficult.
You’re trained to hustle as hard as possible. Do as much as you can and make the business successful.
Then the acquisition happens, and new management is in place. Your job is now to manage your wealth, maintain it, and “optimize it” (which means different things to different people).
Once he had a financial plan, John took time to dive into:
Friends - Able to grab weekly lunch and catch up with friends. Building more relationships with people.
Family - Can take more trips and be more present.
Hobbies - Started taking tennis lessons and playing basketball every week.
Projects - Toying with AI projects and new business ideas.
What lifestyle changes did you have post-windfall?
John had two big changes after selling his company.
When he traveled, he bought business class
Purchase a larger home for his family
He’s talked about buying a Tesla but doesn’t drive much.
I’ve found the following lifestyle changes:
Bought a Tesla for my wife
Bought a home in Southern California
Items under $100, I don’t think much about
I don’t check prices nearly as much at restaurants, if at all
Moved from $150-200/nt hotels to $250-300/nt hotels
Investing After a Windfall
First things first though, take your time. Get comfortable, pay your taxes, and psychologically ease into it.
There’s a million and one opinions online on investing a windfall. Dump it all at once into ETFs, dollar cost average into S&P 500, 60/40 stocks to bonds, give it to a financial advisor/wealth manager, to name a few.
Your job is now to manage your wealth. That could be directly, via a wealth manager, or a combination of both.
“Going back, I would have slowed down and deployed the capital slower.” John mentioned.
John ended up using a wealth manager for “a good chunk.” He said they’ve been a partner and have given access to alternative investments. Those helped boost returns in the bear markets of 2022.
Intentions to Sell Your Business
I bootstrapped my business as did John. I mention this because you focus more on the product/company than on fundraising and being acquired. Potential acquirers do reach out though. This could be competitors, strategics, or private equity.
I was told by a PE associate that we hit an employee threshold that showed up on their CRM to start reaching out and building a relationship.
John said he was very lucky with timing and had a lot of interest early on.
He was selling his software to Fortune 100 companies which piqued their interest. 1yr into running his business, potential acquirers were curious to partner and/or buy out.
Timing, timing, timing. Part of the luck characteristic in a windfall.
How to Handle Early M&A Chats
When having early chats with potential acquirers, there are a few tips to follow. Here’s a list of items John and I came up with:
Be honest - What do you expect, want, and where do you see things going? Scare them away a bit with
But don’t say too much - Don’t jump into sharing numbers around the business so easily. Don’t share secret features or roadmap yet. Go higher level with numbers that also make them excited. Growth, low churn, and truthful things that get the acquirer excited. Revenue/margin can help acquirers determine if your company is within their criteria or not.
Be comfortable not sharing - There are going to be awkward silences when you don’t want to go into certain strategies, ideas, numbers, etc. That’s ok, get comfortable with it.
Get advice - If this is your first time, reach out to someone who’s sold their business before. Find them on Twitter or ask for referrals from other business owners. Talk to people to reduce mistakes.
Find other potential acquirers - The easiest way to get a higher valuation, and get other buyers interested. The easiest way to get other buyers interested, tell them about the other buyers. “It makes a huge difference,” John said.
Do your strategies align - What do you want from the deal? Liquidity? Chance to grow a bigger business? Retire? Make sure those goals align well enough to make you comfortable.
Sweet Spots & Dead Zones For Valuations
Acquirers have criteria for the types of companies they want to acquire. It could be companies with “$3m-$10m ARR with 80% gross margin” or “cosmetic e-commerce companies with $10m-20m in revenue”.
Even before John started his company, he sat down with his partner and said, “Let’s build a company that can sell for ~$40m”.
Why $40m?
Getting into a $100m+ valuation and below ~$40m, the number of buyers is slimmer.
John then took that number and looked at his life. What does this mean for us as a family? Could we live forever on it? Could we buy a dream house?
Hint hint, they exceeded that number - Listen to the full episode
How was the due diligence process?
Both John and I felt overall it was a short due diligence process. But those days were filled with late nights and data requests. John’s was only 35 days, mine was ~3mo.
Mine went smoothly, with lots of reporting requests and questionnaires. But you know, they are buying your company.
Tip: Make sure you’re not using any open-sourced software that would require you to open-source your whole code base 😉 (more info)
Would you move states to optimize for taxes?
This is an interesting one. Changing your residence to a lower-income tax state is a great option if you’re looking to save.
But is it worth the lifestyle change? Do you actually want to be there? Does it have the activities you want?
John says, just go make more money. You have the money to do what you want now, use it.
Does he regret selling his business?
“Absolutely not.”
Among many changes, having direct cash flow vs cash in a bank account/investments is a
I felt the same. I think it’s because we’re mentally trained to generate cash from a job or business for so long. When that stops, and you’ve pulled forward future revenues into cash, it’s an odd feeling.
“Cash flow makes you feel richer.”