Should you sell your business?

Genevieve Signoret

Letter from the President

Yesterday I gave a talk in Mexico City at which someone raised his hand and said, “I have a buyer for my business. Should I sell out and invest the proceeds to invest in the market?” Obviously my speaker was not asking me for the right answer but for an approach to arriving at it himself.

I answered, first of all, if you are not only the controlling shareholder but also the CEO, separate the investment decision from the job decision. From experience, I can guess that running your company is a thrill. But other thrilling jobs are out there, and your buyer may even ask you to stay through a transition stage. So let’s focus on the investment question here.

To do so, try playing this thought experiment: in your mind, do sell the business, at the price you think you can get.

Are you picturing the cash piled up in your checking account?

Now decide: should you buy back your business or invest the cash in a portfolio broadly diversified across asset classes, countries, currencies, and securities?

Remember, if you buy back your business, you’ll be taking on astronomical concentration risk. Your business represents a single asset class: equity. Also, probably, concentrated country and currency risk and a single segment of a single industry. Finally, it’s just one company.

Now that you’ve pondered the concentration risk, ask yourself: “Under my control, am I likely to earn such an extraordinary return on my investment that I’ll be rewarded for all that risk?”

Only you can know the answer. If it’s no, you should sell.

What you just did can work for any asset sale decision, so let’s review. First, pretend you’ve already sold. Then (ignoring transaction costs), ask yourself, should I buy that same asset back or should I invest in something else? If the answer is invest in something else, then sell.

What I’ve illustrated here is what economists mean when they say “ignore sunk costs”. Hold in your investment portfolio only those assets that you would buy if you were entering the market today.

Shed the rest.


Previous Letters from the President

It’s the benign sort of volatility (2014 08 08)

Low for Long, Loans to Kids (2014 08 01)

A worrisome buzz (2014 07 24)

Did you see that?(2014 07 18)

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