Continue, Detach, Replicate, Sell Out, or Sell Up?
By James Cannon Johnston
This is a sanitized version of the advice I gave to a founder/CEO client who was unsure how to proceed with his business. The core question was, “What’s next?” He had built a profitable business that had potential to grow quite a bit more. Elements of its technology could be the basis of separate new businesses with other customer sets and even in other industries. We talked about it for months. I outlined for him the following five possible paths forward.
Where We Stand
The company is changing from a software company to an administrative processing service. Broadly speaking, this will mean lower risk, lower average wage and skill, higher turnover, more stable revenue and profit, with less chance of bonanza or crash, more operational controls, less intellectual stimulation (think “time to make the donuts”), less technology creation, more technology use.
The growth of the service division has been as fast as most hot startup companies would hope for, over 100% in a year, with small risk and investment. Yet, this is a business that venture capitalists would not fund, because the ultimate market size is smallish and there is some chance the market will go away. On the other hand, this is a great business to own. It can provide you a good income, low stress, and something fulfilling to do. A year ago, we agreed that a priority for the coming 12 months was to grow the company’s annual revenue by 28% and cut your time to 20 hours a week. In fact, we have grown revenue 48% and for next year we’re about to put 33% growth into our plan. My impression is that you have cut your time some, but not down to 20 hours. Going forward the next few years, here are five possible scenarios:
Five Paths Forward
- Continue. If you take this path, the business does well, you work in it full time, and you keep involved in the day-to-day operations. In three years, the Company grows to double or triple its current size, with no major change in the concept. Your two top direct reports stay in their current roles, only bigger. Your cash income doubles or triples.
- Detach. Choosing this path is similar to taking the Continue path, except you groom your top operations person or a new person to run the Company. You show up a day or two a week. Your income goes up less. You have time for other things (either a business with no connection to the company, or enjoyment of family and life).
- Replicate. Following this path, you shrewdly figure out what part of the Company’s success is replicable and you build one or two related businesses every 5 years or so that can each grow to twice as big as the company is now, or so. Some ways this could proceed:
- Maybe the customer set is the replicable part. This means you figure out what else you can sell to the same companies.
- Maybe the development and operations know-how is the replicable part. This means you find other large unmet needs that can be met with a similar approach for new sets of customers.
In this Replicate scenario, you would probably still have someone running the company’s base business, as in the detach option, but instead of showing up a day or two a week, you would show up 50 or more hours a week to build the new businesses. One way to get started would be to buy a business.
- Sell Out. You sell the Company and within two or three years retire or do something unrelated.
- Sell Up. You sell the Company and follow a career path with the buyer.
Choosing a Path
Step one is to look at your life today and pick out the parts you like the best and would like more of. For instance, do you enjoy conceptual creation of systems, or detailed implementation? People or ideas? Work or family? Money? Hands on management or running by the numbers? Being independent, or part of something larger? Then, look at which scenario offers the best fit. Then, investigate how feasible the scenario is and begin to make detailed plans if it looks promising. Without knowing intimately what you want from life, here a few of my preliminary observations:
I think the problem with Continue is that you will get bored. Although the business will require your full time, it will not interest you.
One fix for boredom is to put less time into, and get less fulfillment out of, the work part of your life, and switch more to other parts. The two scenarios that accomplish this are Detach and Sell Out. The challenge of detaching is that it requires truly transferring responsibility and authority to someone else. The challenge in selling is finding a buyer (a long process that’s often a dead end) and giving up control of your creation.
Another fix for boredom is to make work more interesting, and to put a lot of yourself into it. The two scenarios that offer this are Replicate and Sell Up. Replicating involves real work and real risk, and unfamiliar ground, but it does keep you independent. Selling up has the same difficulties as selling out, but could create career opportunities for you that your own company may never offer.
Selling out or selling up gives you some guaranteed financial reward for your years of work. If you replicate, you are essentially making yourself a buyer/investor instead of a seller.
The Rest of the Story
The founder/CEO chose to sell. He stayed to run the business, but not for long. Other key people on the team stayed longer. The business did extraordinarily well. Years later, the founder/CEO mildly regretted that he sold as soon as he did.