For most of us, fear and greed drive financial decisions. Our desire for gain is often overpowered by our fear of loss, which is why, as investors, many of us keep stocks past their point of being overvalued.
The same is true of entrepreneurs, most of whom hold on to their companies longer than they should.
Take Basil Peters, for example. Mr. Peters was a co-founder of Nexus Engineering, which made the central electronics for cable companies such as Rogers and Shaw. Mr. Peters led his company to 10 years of increasing profitability through the 1980s by expanding aggressively into the United States.
American customers were buying his products on leveraged debt provided mainly by junk-bond dealers. Then in 1990, the savings-and-loan crisis wiped out the junk-bond market, triggering a cash crunch for cable operators. The cable companies put all major purchases — including Nexus Engineering's gear — on hold until they could find alternative sources of money.
"Volume dropped 90 per cent overnight," says Mr. Peters, the author of Early Exits : Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists).
Unable to scale back his manufacturing operations quickly enough, Mr. Peters had to organize a hasty sale of his company to Scientific Atlantic (now part of Cisco) for a price equivalent to one third of the valuation Nexus Engineering had received during its previous round of financing.
"It was the first time I lost several million dollars," says Mr. Peters, who has gone on to start a number of other businesses, including a hedge fund and a venture capital firm.
Mr. Peters says he believes it's human nature to hold on to a business too long for fear of missing out on some of the upside. But he has found the opposite to be true. Most entrepreneurs don't contemplate an exit until their shareholder value has started to slow or their management team loses a key member or their product line tires.
So as counterintuitive as it may feel, the right time to sell your business may be when you least feel like selling.
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company. Follow him on Twitter @JohnWarrillow.