From Owner to Investor

You already carry the risk. The deal just puts a number on it.

If you’ve built a business, you’ve spent years thinking like an operator. How do I keep my best people motivated? Should I stock up on raw materials when the price is right? How do I make my supply chain run better? These are the right questions when you’re running something. What about when you are investing in something?

Concentration

As an owner, you have nearly all of your wealth tied up in a single, illiquid asset. No financial advisor would recommend that position in a portfolio. But that’s exactly where most business owners are. The concentration has probably served you well, but it also means you’re fully exposed to every risk the business carries. A facility disaster, a key employee walking out, a major customer leaving… You’re on the hook for all of it, all of the time.

The investor will ask the question, “Is this level of risk still worth it?” When the operator can ask that question with conviction, he or she is ready to sell.

 De-Risk

Making the mental shift from operator to investor is hard enough. But there’s a second mistake waiting on the other side of it, and it catches even sophisticated operators off guard.

Every deal includes indemnification provisions—typically an escrow holdback, sometimes representations and warranties insurance. Many owners treat the escrow like a threat. It’s their number, and some of it is being withheld. It becomes emotional, as if every dollar in escrow is already lost.

The indemnity escrow is a reserve set aside for claims that may or may not materialize. If claims come up, your sale price adjusts downward slightly. If no claims come up, you get the money back. Either way, you’re not carrying the full weight of the business anymore; you’re only carrying a small, defined slice of it, for a fixed period of time.

Right now, as the owner, you’re absorbing 100% of your business’ ongoing risk, every day, with no end date. A typical indemnity structure asks you to carry roughly 10% of that risk for 12 to 24 months. If your business is worth $10 million, you have $10 million at risk. If you sell that business and clear $9 million at closing with $1 million sitting in escrow for 12-24 months, you have $1 million at risk. You should not think of escrow and indemnity as a punishment, but rather a great trade, and any investor would see it like that immediately.

Shift your Mindset

The math on selling is straightforward. It is much more difficult to separate your identity from the business. The owners who can do this are the ones who learn to evaluate the business not as something they built, but as a financial asset they hold. When you can look at your company that way, the escrow stops feeling like a threat. The indemnity stops feeling like a risk. And the sale stops feeling like a loss. It starts to feel exactly like the payoff for everything you’ve worked to build. Talk it out with your attorney or financial advisor. He or she can be your objective backboard.