Commentary: When is the right time to sell?

March 10, 2008

Like the song says, "You gotta know when to fold 'em." But how do you know when it is the proper time to sell a business?

Age and health issues aside, I suggest the "trigger" moment is when there is a looming fundamental adverse change in the industry. One should not sell needlessly. The government imposes a harsh penalty for those transactions. It's called a longterm capital gains tax. I would not fault anyone, however, for a premature exit that creates a first opportunity for wealth and diversification.

Learning from a near disaster in the racquetball business, I have preferred industries that are insulated from escalating competition. These industries generally have significant barriers to entry; they have included publishing, cable television, radio broadcasting and banking. In the last 20 years, I exited two of these industries because they were in the midst of fundamental adverse change.

My partners and I were pioneers in the cable television industry. A pioneer has opportunities to make mistakes that have never been made before. In the early days, cities granted a franchise to only one operator, creating a quasimonopoly for the boob-tube entertainment dollar. No wonder the industry flourished unfettered for 20 years. Happily, we rode along.

In the late '80s, I learned that a satellite receiver the size of a serving platter was successfully tested in Canada. My first thought was, "This small, affordable dish could ruin our industry." We had purchased for $100,000 the first dish in the state of Indiana, a mammoth contraption installed to provide our customers in Auburn with independent signals from Chicago and Atlanta. HBO was yet to come. At the same time, state governments and the Federal Communications Commission were deregulating cable television and allowing competition, particularly from telephone companies. It was time to sell.

I liked the radio business in part because there is a finite number of licenses issued by the federal government. If you sit in on this poker game and you play a losing hand, because of the license limit, there is always another player willing to take your seat. Many times, radio operators lose money during their course of ownership only to make a full recovery and more on sale.

We had been in the radio business for more than 20 years, the last dozen operating WZPL-FM, WTPI-FM and WMYSAM in Indianapolis. By 2004, the game was changing. "Time spent listening," an important measure used by advertisers to judge radio popularity, was waning and the industry was losing its youthful listeners, perhaps to iPods and other MP3 players. Moreover, satellite radio loomed as a growing threat to terrestrial licensees. It was time to sell-again.

In both of these exits, we were fortunate to find buyers who didn't see the industries the way we did. Perhaps we were lucky, but in both cases subsequent selling prices suffered precipitous declines.

As an aside, it is important to select the right buyer for the business. One might think the right buyer is the one with the highest likelihood of showing up at the closing with the largest basket of cash. There is at least one other factor. One should ask which prospective purchaser will be the best shepherd of the business for the community and which will be the best employer for the business associates left behind. On the sale of our radio business, two of the biggest players in the industry were not allowed to bid, having failed at least one of those important screens.

A business adage states, "Do not get emotionally attached to your business." I did. I loved the cable TV and radio businesses and the people I worked with. I miss them. I hope these industries persist and prosper. And yet, I am pleased we had the foresight and discipline-and the good fortune-to exit at the right time.

Maurer is a shareholder in IBJ Media Corp., which owns Indianapolis Business Journal.To comment on this column, send e-mail to mmaurer@ibj.com.
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