Timing a Sale

EBay have just sold 65% of Skype; let’s think about why.  In daily life, just like in the Dragons’ Den, I see too many people with no long-term strategy for what (and when) they want to get out of their businesses.  Entrepreneurs, venture capitalists, call us what you will; but basically we want out and so should you.  We get our buzz out of analysing a business quickly, buying it, improving it or turning it round from loss to profit and then selling it.

I find it useful to look at another example to make the point. Take dealing in shares. 
Start from the basics.  To make money in shares is easy – buy shares when their price is low and sell them when it’s high.  When I say that to people they get very annoyed and frustrated.  It’s a statement of the bleeding obvious and leads to the question – “Yes, but how do you know what to buy and how do you know when to sell?”

OK, let’s think about it.  How many times have you heard people say “Oh, I bought the share at the right time and it shot up but I didn’t sell it and now it’s on its way down?  I still don’t want to sell it because I’m sure it will recover and go back to the price it was at its peak.”  Let’s think about the logic, or rather illogic, of that statement.  In the first place they’ve done well.  They bought a share and it went shooting up, their timing was good.  Why didn’t they sell it?  The only logical reason is that they thought the share was going to go further up.  But is that logical?  After all if a share goes up by 25%, what are the chances of its doing so again?  I know there are special circumstances when this might be the case but that’s probably unusual.  If you want to deal in shares buy them when they are at a low price and remember to sell them when they have gone up.

The second part of the statement is equally fallacious.  If a share goes down it is for a reason.  The market, who have got a lot more time than you to study these matters knows something that is making them take their profits or cut their losses.  When a share goes down - sell it, is a good rule of thumb.  After all, if a share goes down from 100 pence to 50, it has collapsed by 50%.  In order to go back to 100 pence it has to rise by 100%.
I find it useful to use the example of dealing in shares to ex plain how dealing in businesses is exactly the same.  The point of being an entrepreneur is to buy companies for a low price and sell them for a higher one.  The art of being an entrepreneur is to know which ones to buy and when to sell them.

So, EBay is selling 65% of its share in Skype for a sum of money much less than the value they bought it at.  Quite right; they made a mistake, Skype was not the strategic fit they thought it was and they’re cutting their losses.  We can all learn from them.

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Tip from Shaf – You don’t have to sell it all
When you sell businesses for a profit it is not necessary to sell the whole thing at first; it might have some assets in it that you want to maintain an interest in, or the buyer may want you to stay with the company for a while as part of the terms and conditions of the sale; so sell a part of it.
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Look for opportunities to sell as well as buy; that’s when you make money