David’s Articles

David has been writing and publishing since 2006.  

This post was written and published prior to September 2023 when David and his prior firm, Family Capital Strategy, merged with Greycourt.  Views expressed reflected David’s personal views at the time and do not necessarily reflect the views of Greycourt.  Posts and information may be out of date and should not be relied upon for investment advice.

You Don’t Have to Sell Just Because the Party Might Be Ending – Exiting is More Complicated Than That

Jan 16, 2020 | Family Wealth

A boy is given a horse on his 14th birthday. Everyone in the village says, “Oh how wonderful.” But a Zen master who lives in the village says, “We’ll see.” ‘The boy falls off the horse and breaks his foot. Everyone in the village says, “Oh how awful.” The Zen master says, “We’ll see.” The village is thrown into war and all the young men have to go to war. But, because of the broken foot, the boy stays behind. Everyone says, “Oh, how wonderful.” The Zen master says, “We’ll see.

   – Phillip Seymor Hoffman as Gust Avrakotos – Charlie Wilson’s War

Photo by Michael Jasmund on Unsplash

There is a piece making the rounds on Bloomberg (” Family-Owned Businesses Urged to Sell Before the Party Ends this week saying that if you have ever contemplated selling your business now is the time to head for the exit. While a bell is never rung at the top of the market cycle, the combination of an extended economic expansion, strong market returns, low interest rates and a massive amount of capital sitting on the sidelines within private equity funds combine to make a pretty good time to exit. Or so the theory goes.

Our caution would be simply that of the zen master – ‘we’ll see.’

The choice to sell one’s business is perhaps best thought of as the movement of liquidity from one pool to another. So while the business owner hopefully takes advantage of favorable valuations to sell his business for a full valuation (or perhaps even more than a full valuation if a case can be made for ‘synergies’). At the transaction’s close, the liquidity flows from the account of the buyer to the account of the owner.

The question then arises, what next? 

One phenomena we have seen in many business is an inadequate understanding and accounting for the actual returns of capital invested in the business. For many (most?!) businesses, actually tracing the value delivered from each incremental dollar of capital invested in the business is exceptionally challenging to do. 

Despite this difficulty, at the most simple level, a return on invested capital (ROIC) figure can be calculated for any business. ROIC looks at the after tax rate of profit (Net operating profit less taxes – NOPAT) in relationship to the capital invested in the business (Debt + equity).  This figure is important for the business owner simply because they own the ROIC. If a business can be simply thought of as a complicated printing press for profits, ROIC tells you basically how productive your profit machine is relative to the inputs. 

When the business owner knows their ROIC and can make thoughtful decisions regarding capital allocation within the business, ultimately every dollar of cash put in the business will compound at the ROIC.

When the business owner exits, they lose access to this compounding machine, and have to pursue returns in an open and efficient market.  While the funds are now liquid (able to get to the cash quickly) and diversified which are all positives, there is a cost to these features – often times a lower rate of return available for deploying the capital.  So while the business owner has taken advantage of the dry powder available to do his deal, after close, he is now part of the dry powder and has to figure out what to do with the new found largesse.

As such, while valuation is an important consideration in deciding to sell the family business, our caution would be that it is not necessarily a panacea. Instead, there are a whole host or inter-related trade-offs that must be considered to make a sale decision, regardless of market conditions.


About David

David is the Founder and CEO of Family Capital Strategy, a strategy consultancy for family offices and family businesses based in Nashville, TN. We help families stay invested together through the design of the family office and the thoughtful development of the family’s investment program. We provide objective, conflict free advice in a strategic, customized and multi-generational manner.


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Nashville, TN