
Sell it or run it, there is no middle ground - jacquesm
http://jacquesmattheij.com/sell-it-or-run-it-there-is-no-middle-ground
======
netcan
This is a counterintuitive point, and I think mostly gets glossed over in a
lot of high level thinking. For example, if you're reading some generic advice
about valuing a small company, it will usually point out that "profit" needs
to be expressed net of the owner/manager's salary, the salary a buyer would
need to pay someone to be General manager of this business. Economics
textbooks do something similar.

This might give you the impression it's normal to hire general managers for
businesses. In reality, it's rare that a "small company" (say a turnover of
$1m-$10m, for a typical software or services company, or even 10X that) does
this.

A clean break between ownership and management is a difficult thing.

Jacques does an admirable job of breaking it down in a way that gets the
message across. To go further, I actually think it could be a great topic for
an out-of-the-box young economist to take on. Like a modern Ronald Coase's
"Theory of the Firm." It's got tentacles in a lot of interesting questions.
The unpopularity (these days) of "adult supervision" investor supplied CEOs,
for example. The relative obscureness of SMEs as an investment class outside
of high risk VC for another.

It would be very unusual for someone to put his/her net worth (say $2m) into a
small business unless they can run it. Does an economist-ic explanation exist?

~~~
roymurdock
Human capital - the original owner/manager knows infinitely more about the
business than the new manager does.

For example: I recently took a class in college where a team of engineers and
business students would pick up and run with a venture from the previous
semester. My team was producing mechanical agricultural products for rural
women in Ghana. I was technically the "Project Manager" but in reality, I had
no idea what was going on for the first two months: who were our contacts in
Ghana, why should they trust me, how had the design of our products changed
over time, who was supplying our raw materials, what was the state of our
financials & grant proposals, how about marketing and sales channels, what
even is a Cassava?! It was really disorienting and frustrating. Yes, there was
documentation [1], but reading something vs. doing something are completely
different.

The most valuable members of these teams are always the ones who have stayed
on the project for multiple semesters, with the overseeing professor (6
semesters of experience) being simply indispensable. If he had been replaced,
the project would've fallen apart immediately.

Of course, this becomes less and less essential as the company gets larger.
Replacing the CEO at a Microsoft or an Apple may change high-level decision
making, but most of the human capital is stored within the large, diversified,
hierarchical employee base.

As for putting your entire net worth into one investment, that's a simple
risk/reward profile. If you're going to put all of your monetary assets into
one investment vehicle, you're probably going to put all of your other assets
(skills, contacts, time) into this investment as well. Capital attracts
capital, be it fiscal capital or human capital.

[1] The documentation was actually excellent as each exiting team had sworn to
do a great job so that the next team wouldn't have to go through the same
frustration that the exiting team had experienced. Wishful thinking.

~~~
bmh100
This is part of the reason why working for a company as part of buying the
company exists. In small businesses, it is possible for an interested
purchaser to actually work under the existing owner for months or years to
receive training and ensure the business will continue to survive. Even
founders of lifestyle businesses take a lot of pride in what they've built, so
there is a sentimental reason to sell this way too.

------
crazygringo
What size company is he talking about -- 5 employees? 15? 50? 500? 5,000?
Public companies are certainly run with ownership being different from
management.

But if we're talking about a 15-person company, the author says:

 _" This means that before long there will be a general feeling of resentment,
after all if you (and possibly your co-founders, also lying on the beach) are
going to receive all or at least a very large chunk of the profits then why do
all the hard work?"_

That big chunk of profits comes from the fact that you took the initial risk,
you worked the endless hours at the beginning, you created the whole thing in
the first place. Why on earth should they resent you continuing to take your
fair share of the fruits of your previous labor? If they have a problem with
that, the problem isn't with you, it's with capitalism in general.

You _do_ need to make sure everyone continues to be appropriately invested in
the company, including the new CEO. But the idea that you should either run a
company or not own it at all is ludicrous -- taken to its logical conclusion,
this means investors shouldn't exist!

~~~
Frondo
You raised a good point in bringing up that phrase "fair share." What is the
fair share for someone who doesn't do anything? What should someone get for
mere possession?

I'm asking not in the present-day legal sense (where the answer is, whatever's
fair is whatever you've clawed out for yourself), but in the moral sense of
how much should ownership of _anything_ actually be worth if you're not
continuing to put any effort into a venture, but are totally passive--a name
on paper.

Where does "setting up and creating a thing and then profiting as an absent
owner" cross over into rent-seeking?

~~~
pc86
> for someone who doesn't do anything

Presumably that person who "doesn't do anything" now spent many years working
12+ hours a day, 7 days a week, for zero pay building the business. It would
not exist in any form without them.

~~~
Frondo
So, someone spends 12+ hours a day, 7 days a week, for zero pay, for some
period of time (say, a year), and for the rest of their life, they receive
free money.

Tweak the numbers but that's what you're saying in a nutshell... and that's
certainly the way the world works now.

Should it? Do we like the idea of "receive free money" because there is
entrepreneurship involved? What if it someone who was born into owning a
business? Do we still like the idea as much?

~~~
sfafdsdf
The other side of it is that the entire enterprise would theoretically not
exist without that initial effort.

While it may not appear fair under certain ethical frameworks for someone to
receive free money _, it seems to be that the choice is "everyone gets
nothing" versus "someone gets more than others because they created it".

_ in my experience, this is a red herring. I know very few founders who don't
work harder after an acquisition or capital investment than before. Those who
are sitting on the beach tend to have sold their interest.

~~~
Frondo
Again, how long after that enterprise has existed _should_ a person get to
claim free money? I think that phrasing, "may not appear fair," is kind of a
weaselly way to say "rent-seeking is ok and let's keep it" (which is, I get
it, a common sentiment among people who think they might be the rentiers some
day). I don't think it is good for society, certainly not the one I'd _like_
to live in, though it sure is good for the person getting that free money.

(And yes, I know this is largely in the realm of hypotheticals, because it
seldom happens that the owner is totally absent...)

~~~
jamestnz
I get the moral argument you're making, but there's a practical side to it,
too.

In any capitalist system, the fruits (profits) of an income-generating asset
(such as a business) accrue to the owners. Assuming that the idea of private
property ownership exists, I can't think of any other coherent place for the
profits to go, other than the owner.

Sometimes, a business might be an unexpected hit, taking off and generating
revenues beyond the wildest dreams of the founder. Suddenly the company is
flush with cash. Now assuming all the employees are fairly compensated, and
all the company's other financial needs are met, then beyond a small buffer,
what is there to do with the excess cash aside from paying it out as a
dividend to the owner?

So I guess my point is that we can make moral hypotheticals all day (about
whether it's "right" for the owners of a profitable company to get "free"
money "forever" without necessarily "doing anything" further), but I'm not
sure what other system we could put in place within a capitalist framework. If
a company is treating its employees well, meeting all needs, and still
generating an operating surplus, where else would you have that money go, if
not to the owners?

Also I think your use of the term "rent-seeking" here is incorrect. A business
owner receiving "passive" (or at least "not much active involvement") income
from the business they own is kinda the antithesis of rent-seeking.

Rent-seeking behaviour is the attempt to increase your share of the wealth, by
means other than generating additional wealth. When you're the one who owns a
profitable company, you're the one generating that wealth.

The classic example of rent-seeking is someone installing a chain across a
river that happens to run through their land, and then starting to charge
people to pass through "their" bit of river. They add no value to the economy
in doing this, no product is created nor any service rendered; they are simply
extracting rents from river-users.

Another example might be when a company seeks to tilt laws/regulations in its
favour (e.g. through lobbying), with the intention of increasing the share of
the wealth without the business actually having to generate it. Just like the
river, no additional wealth is generated as a result of this action: existing
wealth is merely being redistributed (toward the rent-seeker) by government
policy.

The key concept in rent-seeking being that wealth (the so-called "rent") is
being captured by a party (the rent-seeker) without them generating it.

~~~
Frondo
Where you said...

"Rent-seeking behaviour is the attempt to increase your share of the wealth,
by means other than generating additional wealth. When you're the one who owns
a profitable company, you're the one generating that wealth."

When you own a company, you and everyone else who shows up that day to work
are the ones generating that wealth. Ownership by itself doesn't generate
anything. Activity does.

------
jasonkester
One way to work this is to have the person who replaces you be "you, but only
a few hours a week".

That is, automate your business to the point that it takes substantially less
than one full time person to run it. Kill off all manual recurring tasks,
automate all the common customer service interaction, get the infrastructure
ticking away so that it stops routinely blowing up on you. Get things down to
just a handful of customer emails that actually need a human response, then
book that flight to Ibiza.

They have wifi, I imagine. Run your business over coffee in the morning, then
go off and live your life.

~~~
s73v3r
As an employee, why should I bust my ass working all day if you're just going
to answer a few emails over coffee and that's it?

~~~
thaumaturgy
Because those few emails might bring in more customers which might bring you a
bigger paycheck.

~~~
TeMPOraL
I'll put it in a less charitable way - because those few e-mails are probably
worth more to the company that a month of your work.

I find those "The Dog in the Manger" assertions weird. Most businesses are
started by people wanting to make big money - often to secure not only
themselves, but their families and causes they care about. Can't blame them,
because frankly, even 8h of work week most of us are trapped in seems like a
ridiculous waste of life. So the system promises them more money for less
effort if they shoulder the risks and initially work their asses off to build
a business. They do so, and now we should renege on the promise? Sounds like a
great idea if you want to ensure the next people decide not to bother starting
anything.

------
ThomPete
Yet I know several founders who do exactly that and with great success.

I think it comes down to what kind of business, what your business is based on
(IP, network, patents, technology, marketing) and if you are the kind of
person who understand how to hire the right people and delegate the right kind
of jobs.

There is always a middle ground.

~~~
jacquesm
For every rule there are exceptions. If you're 100% confident that you can do
this by all means, go ahead. But my experience to date suggests this is a
recipe fraught with all kinds of trouble and just hiring 'the right people'
isn't going to cut it (if only because people change over time). In the end
you'll either end up returning to recover from some disaster (it's still your
problem after all, as a majority shareholder), you might lose the company
altogether or you'll end up selling it anyway but in worse shape than when you
left.

There is always a middle ground, but sometimes that middle ground isn't quite
wide enough to stand on and it's better to go for clarity, have your hands on
or have your hands completely free.

~~~
nostrademons
I know a couple people with businesses like this. In each case, it's because
they stumbled into a business that was unexpectedly profitable, but which
wasn't something that they really wanted to be in. Usually it's not something
that can really be _sold_ either - typically they're taking advantage of
temporary market niches, are too small to be of strategic value to a big
player, and have a geographically-distributed and lightly-attached employee
base that's not a good candidate for a talent acquisition.

Under these circumstances, usually the most rational course is to treat the
business like an annuity: while it lasts, milk the profits, do all the stuff
you really want to do like travel the world or write a book, and save up a
bunch of money. The gravy train will end eventually, but they never wanted to
be in this business in the first place, so "losing the company altogether" is
a plus.

------
brudgers
The missing piece if the puzzle is that the road to passive income is passive
investment. Cashing out and investing the proceeds in suitable syndicates is
the what is likely to work. If you retain significant equity, you didn't cash
out and you've got a passive investment portfolio with no diversity.

~~~
jacquesm
That's an excellent way to look at it.

------
jseliger
Incidentally, this is also true of renting a condo or house you own. A couple
friends have attempted to rent their condo or house and move somewhere else.
This has never worked out well. It is possible to hire a company to manage the
condo or house, but that is expensive and the profits never quite arrive.

I have seen a couple friends successfully rent places they live near.

~~~
pc86
> It is possible to hire a company to manage the condo or house, but that is
> expensive and the profits never quite arrive.

This makes sense if you think about it from a capitalist perspective, though.

Adam owns a condo and rents it out. He makes $500/mo after his expenses.
Unless competition for property management is very high (quite the opposite),
the "perfect" amount to charge for that service is going to be as close to
$500/mo as possible while still getting Adam to pay it.

The most common complaint I've heard about property management firms is that
somehow their prices always seem to be somewhere in the 95-105% of net profit
for a single well-appointed property.

~~~
dhimes
I've discovered that this is a general rule in any similar industry- time-
shares, boat-charters, etc. There are people who are professionals in that
industry. They know where the money is, and they get it. We are basically
amateurs that they are welcoming to their playing field.

EDIT: s/we/they/ in the last sentence.

------
JoblessWonder
I'm currently working for a smallish family-owned company and I'm tempted to
forward this to the owner.

He doesn't want to retire but also doesn't want to commit to the time
requirements of the day to day operation of the company. This wouldn't be a
big deal because he has set himself up with some great managers and a solid
foundation.

However... about once a month he gets an itch and decides to get in the middle
of the smoothly running operation he spent decades creating because he "wanted
to help." It just causes chaos and anger by the people running the company for
him the other 25 days each month.

------
URSpider94
I don't agree that it's this black and white, but it's likely to be true for
most small-scale companies.

The way I always describe it to people is that salary != profit. Let's say
that you are making $100k a year running your company. How much would you have
to pay someone else to do your job with the same level of effectiveness? If
it's $50,000, then you're making $50k a year in profit for being the owner. If
it's $150,000, then you are actually giving up $50k per year for the privilege
of being your own boss.

It's certainly possible to be a non-participating owner and make a good profit
on a business. This is what Warren Buffett does with Berkshire Hathaway -- he
buys profitable, well-run companies and usually keeps the former owners on to
continue operating them. Doing it from the other direction is much tougher,
because you either need to make yourself redundant or hire your replacement.

------
hobofan
I might be missing something here, but isn't hiring somebody new to do your
job exactly what the new owners of the company have to do if you sell it?
Maybe this will be delayed by golden handcuffs, but sooner or later it has to
happen.

~~~
jacquesm
If you sell it you won't be hovering over whoever gets placed in your position
to tell them how to do their job and technically it is now the buyers problem,
not yours.

Bill Gates did it with Microsoft and at that level I'm sure that there is
enough momentum in the business to keep it moving along or even to improve.
But most smaller businesses (say < 30 employees or so) are both culturally and
dynamically much more personal and being both gone and still present in the
background creates a strange power dynamic (who's the real boss?) and
frustration.

------
tomkin
Has everyone forgotten about the "family owned business" or the business where
you just keep it? I feel like I'm saying something foreign, where it shouldn't
be foreign at all. Why does everything _have_ to come down to selling the
company

Here's my point: Everyone believes in growth. And everyone believes in small
business, but people also believe capitalism is fine the way it is.

And we can believe all of those things at once, and wonder why we have poor
people in our society, cheque cashing stores and inequality.

You can believe in those three ideas all you want, but they don't believe in
each other.

~~~
jacquesm
It says 'run it' right there in the title. Keeping it is definitely an option
but running it by remote control is something I advocate (strongly) against.

~~~
tomkin
It does, but the slant always seems to be towards _selling it_ as a better
option. I agree remote-management doesn't work. But even here on HN, very rare
to see a pro-"keep it" stance on anything. Silicon Valley seems obsessed with
"get rich" outcomes.

~~~
jacquesm
It depends on the business, the persons involved and it depends on your future
plans. If you see it as 'leveling up' then selling it is the best way forward,
if you want a nice business where you call the shots that you grow at your own
pace then keeping it would seem to be the best course. But that's a totally
different discussion and a much more complex one.

------
krigi
I worked at a company in this situation. Revenues were stagnating and senior
employees started leaving. The non-CEO partner was uninvolved and kept
pressing for a sale at all business meetings. The atmosphere at the company
was pretty dreary.

The CEO remedied this situation by choosing a new CEO from within the
remaining senior staff, while giving himself a new position of chief product
officer/biz dev.

However, this was all merely a title swap, as the ex-CEO kept tight hold over
the finances. So a weird power dynamic formed, as the new CEO was essentially
effete. Anything that incurred a cost had to be discussed with the ex-CEO. The
new CEO enacted a rigid fiscal policy by reducing headcount and the expenses
under his immediate control. Morale fell and the new CEO eventually resigned.

The company is still in existence, and the owner is considering selling it
now. Hopefully it's not too late.

------
Vivtek
This is the exact same lesson I learned, painfully, with rental property. I
think it probably applies to everything. In my case, despite owning property
in a college town (which you would think would be a sure win), I lost a lot of
money and experienced a lot of stress, and finally came to realize that I
could either be a landlord, which requires personal skills I didn't have at
the time (I think I might have gotten mean enough now - age helps), or I could
just sell the damn thing and walk away. Doing the latter was a good move. I
wish I had done it a couple of years earlier.

------
SG-
I'm seeing this exact thing at a restaurant I work at during weekends. Owner
shows up once a week to drop off pay checks and lives in another city (1.5
hours away).

All those points pretty much apply.

------
Xcelerate
> if you (and possibly your co-founders, also lying on the beach) are going to
> receive all or at least a very large chunk of the profits then why do all
> the hard work?

So... basically the stock market?

~~~
jacquesm
The stock market applies to companies that have gone 'public', not to
privately held companies currently being run by the founders.

The article is not aimed at those that are about to go public or that have
already done so but rather at the founders of companies with up to ~30
employees or so and < a few million dollars of turnover per year.

------
anfedorov
What about moving to a board position, like Bill Gates or Alexis Ohanian?
You're still part of the company, but don't have to worry about day-to-day...

~~~
jacquesm
You can do that, and with a large company it will probably work. For a smaller
company (especially one that is held privately or that only ever received
small bits of funding) it likely is not going to work. One of the companies
I've invested in went through this whole cycle and now has the original
founder back as the CEO after several years of being absent.

The opportunity cost for the founder in that particular case is something I
really don't want to think about even if for me as an investor his return to
the CEO position is good news.

------
voidlogic
>take off to Ibiza and watch the money roll in while lying on the beach.
Passive income if there ever was, it seems such a good idea!

I wish the blog author would have addressed the employee-empowered hands hands
off approach suggested in 4 hour work week by Tim Ferris. That book seems to
suggest (mostly) passive income approach is possible if done right, but this
blog doesn't address that alternative to its suggested bad-outcomes.

~~~
jacquesm
Those are for the most part 'employee free' businesses as far as I understand
it. Any company that needs a real person for its day-to-day management will
not fit in the '4 hour work week' concept.

~~~
voidlogic
You missed the example of his own original company, he had employees, the
moral of that part of the book was proper delegation and giving employees
decision budgets.

------
shin_lao
_This means that before long there will be a general feeling of resentment,
after all if you (and possibly your co-founders, also lying on the beach) are
going to receive all or at least a very large chunk of the profits then why do
all the hard work?_

If they like their job and you redistribute a good share of the profits, I
don't see how this can happen.

------
angersock
_...after all if you (and possibly your co-founders, also lying on the beach)
are going to receive all or at least a very large chunk of the profits then
why do all the hard work?_

This same resentment may (will) occur with early employees if the cofounders
are part time. Have same issue at current company.

~~~
nmcfarl
And the same resentment can happen if the founders are full time. This has
happened to me 2x:

The first the sole founder was seen as fiddling while Rome burned, long
lunches on with rich friends and always on the phone, never doing anything
(and getting paid well for it). Now I recognize he was probably trying to line
up another round - but this was dot.com 1.0, we were young and didn’t know how
the game was played. Also he just wasn’t good at communicating this downward -
or at least as far down as we were.

At the second place the founders were all regarded as incompetent, and thus
getting paid well for doing useless work. I think they where just nerds, and
bad at interacting people.

I think management is hard and resenting your boss is common.

------
sampo
> _Why not hire someone reliable to run the company_

I remember reading a blog post by Derek Sivers, of CD Baby fame, how he did
just that. But I cannot find it now.

------
ForHackernews
> This means that before long there will be a general feeling of resentment,
> after all if you (and possibly your co-founders, also lying on the beach)
> are going to receive all or at least a very large chunk of the profits then
> why do all the hard work?

Isn't that the point of capitalism? Profits go to owners, not workers?

~~~
s73v3r
The point of capitalism is that profits go to those who work hard to earn
them. Why would I bust my ass as an employee if you're just sitting on your
ass, and you're still going to receive the bulk of the reward?

~~~
dragonwriter
> The point of capitalism is that profits go to those who work hard to earn
> them.

No, the point of capitalism -- and for which its critics named it "capitalism"
\-- is that profits go to those who own capital.

The idea that the proceeds generated by hard work _should_ go to those working
hard rather than being captured by capital was sort of the central criticism
aimed at the dominant system of the developed world in the 19th century by the
critics that gave that system the name "capitalism".

------
antidaily
Anyone tried this site?
[http://www.startupadoptionagency.com/](http://www.startupadoptionagency.com/)

------
justonepost
The best way to sell your company is by running it well.

