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Dec. 23, 2020

How to Make the Best Decision About Selling Your Business with Annie Duke

How to Make the Best Decision About Selling Your Business with Annie Duke

It’s an unbelievable Christmas present for Ed to have Annie Duke on today's show. She lives in the Philadelphia area and is the author of Thinking in Bets and How to Decide: Simple Tools for Making Better Choices. In today’s fun and educational...

It’s an unbelievable Christmas present for Ed to have Annie Duke on today's show. She lives in the Philadelphia area and is the author of Thinking in Bets and How to Decide: Simple Tools for Making Better Choices.

In today’s fun and educational episode, she’s going to talk about business owners faced with the real and enormous task of trying to create a liquidity event where they are selling their hard-earned business which could be multi-generational, or they've been approached by a buyer.

Enjoy this conversation with Annie Duke!


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How do your two books differ; Thinking in Bets and How to Decide?

Thinking of bets, I kind of think about as very much of why book. And the why is, why should you care about uncertainty in your decision making and trying to figure out why things turn out the way they do. So there are two forms of uncertainty, luck and hidden information. Particularly I have a lot of focus on luck in that book in the in the sense that you can do everything right and get a bad result, you can do everything wrong, and you can get a good result. And this really frustrates our ability to learn from our decision making in the past, to figure out what outcomes mean to become better decision makers going forward. And I’m kind of talking broadly about why you really need to embrace uncertainty as part of the process of decision making. Now in interacting with people who read that book, and I’ve had very grateful for being able to interact with so many different readers, what I found just sort of a common thing that I found was that they wanted a ‘how.’

There’s luck in imperfect information when I make my decision, so how do I make a great decision? And I just felt like I had heard that from enough people that I should try to step up to the task of really trying to lay out what is a good decision process look like? What are the tools you could use in order to do that? And one thing that came out of that process that was really fun, was that while I feel like Thinking in Bets was more focused on luck, How to decide is more focused on hidden information. And that’s for a really simple accepting it. Whereas the imperfect information problem you can do a lot about, that is the thing that you can control, that you do have some control over. And so this is really focused on how to improve the quality of the information that goes into the decision process in a large part.

How do you define decision making skills?

What we want to think about when we’re thinking about a really good decision process, this has to do with either anything like what are the skills that we have? What are the tools that we’re using? What’s the process that we’re using? That we always want to think about a process, which I can repeat, that will reliably get me the same outcome or something similar on a sort of probabilistically, that I could explain to somebody else such that they could also do the thing that I’m doing and produce something similar in terms of the result. Your gut is not a good decision tool. Honing your gut is not a particularly useful decision skill because if you think about it, your gut is going to produce a lot of different results. You don’t really know why your gut is doing what it is. I certainly can’t teach it to somebody else.

How do I make the best decision when selling a business for the first time?

If you don’t know anything about the situation for it, and I’m just going to challenge that a little bit, so when we think about this informational problem that we have, we sort of fall into two categories on this. Well, on the one hand, we may be overconfident that we know way more than we do. On the other hand, we may think that we know absolutely nothing. So that’s where we tend to fall, we can sort of feel like when we sort of get past the threshold, we’ll start thinking we know everything. But when we can sort of feel that this is a new situation, and we haven’t encountered it before, we’ll really believe that we know nothing.

The first thing I want to challenge the listeners to is to not accept that you know nothing because there’s almost nothing that you know literally nothing about. And as we’re trying to make good decisions, what we need to realize is that every decision contain some sort of guessing, because we aren’t omniscient. We don’t have a time machine to know how the future is going to turn out. And we don’t have all the information that we need in order to make a perfect decision. This is probably not time travelers and we’re not omniscient. So it behooves you to understand nothing is ever totally a guess, it’s always an educated guess. And how much educated can you get into the guess?

 You can always sort of figure out what are the things that relate to the thing I’m about to do that would inform this decision? And not accept that I don’t know anything, but actually say, “Where is the educated in this guess?” And you’re going to get it from two places? One is what you know about it already. But the other is, it was a clue. You could talk to trusted advisors about what worked for them in that situation or what they feel would be appropriate to sell something for. This helps you to build information, you could go take a negotiating course for what strategies to use. Now you start to bring the educated into what you’re doing, instead of accepting this is the first time, so I know nothing.

How does the owner get over his or her emotions to make the right decision while selling the business that is tied to his or her identity?

This is a topic that I’ve been thinking a lot about recently, which is quitting decisions. When we quit things, and that’s what selling is, it’s a form of quitting. You’re selling the business and you’re going to cease to operate it. And what happens is, it turns out that human beings are pretty bad at these types of decisions. One of the main reasons is that we don’t think about the decision as a new decision, we think about all the things that have led up to that decision. So there’s a big fallacy, which is called the sunk cost fallacy, which is kind of part of what you just pointed out, “Well, I’ve put all this stuff into the business.” We start to take into account, like our time or our resources, or one of the things that we really like to protect is our identity. So we don’t want to give up our identity. And if we’re going to do that, we sort of feel like there should be a premium put on the business. There’s something called the endowment effect, where we feel ownership of our ideas and our beliefs in our possessions. And obviously, this is a case where you own the business.

One of the strategies is to figure out first of all in advance, if you were the buyer, what would you pay for it, because that’s how you have to approach that decision. Which is, I have to imagine that I did not build this business because whatever my blood, sweat and tears are, I already spent those, so now I have to think about the business as an asset. And so you need to go through the mental exercise of saying if I were to look at this balance sheet, if I were to think about this business and I was a buyer, in other words, I’ve sold my business and I’m looking for something to buy, what would I price it at? This is a way for you to get outside of some of these things, is to approach it as if you were making the decision yourself. So that’s number one that’s going to get you into a better place in terms of what you would really be willing to sell it for.

Then what you have to do is, prior to getting into the negotiation, you have to set some rules for yourself. This is the lowest amount I would be willing to sell this for, what is my opening offer going to be? How long are we going to negotiate before I’m willing to go down on that? You can actually say, “What are the signals that this buyer would be giving me that would suggest that I might actually give on price a little bit?” Do all of that work in advance and try to do as little as possible on the fly. And in fact, if you feel like too much is happening on the fly, you should say, “Can we stop and start again tomorrow, because I have some things I need to think about.” So you want to do as little in the moment as you possibly can because we want to be stepping away from our emotions when we’re in those situations. It’s particularly good with this kind of thing as you’re thinking about what are the worst terms I’d be willing to accept? What are the terms that I’d really be super happy with? And what would be beyond my wildest dreams? What am I willing to give on? What am I not willing to give on that you absolutely declare that to other people? And you have other people hold you accountable to that?

What are your thoughts on how to fix the emotional connections that seller have to their businesses that hinder them from selling?

Part of this is the advanced work, part of this is this idea of thinking about, what if I were the buyer, would I be willing to do this? You can also reverse that, by the way, and when you’re in a tough negotiation with someone who could say, “Would you be willing to sell this business for what you’re offering?” So you can also flip that as well, which is nice. But another thing that you can do is what’s called a pre-mortem. And this can be really helpful, which is to say, “Let me imagine that it’s a year from now, and I still have not sold this business. What do I think happened? Why did that occur?” And it’s really helpful to get some trusted advisors to fill some of that out, have them do that separately. Don’t talk at the same time, because you’ll influence each other. But let’s say that you’re your trusted advisor for me and I say to you, “Ed, I want to sell this business, I would like to sell it within the space of 12 months, could you do me a favor and go off on your own and just imagine it’s 12 months from now and that I failed to sell the business, could you please write down the reasons why and what your rationale is for that?

I’m going to do the same and then we’re going to come together and talk about it and we’re going to see, oh, we both agree that this is going to be a problem. And oh, Ed, you have something very unique in here. So you might point out, for example, that I kept thinking there would be a better buyer in the future. And then I didn’t take an offer that was sitting right in front of me that was perfectly good because whatever, you’re going to bring this up. And now we’re going to have a discussion about it. And this is also going to help me to realize a little bit more in the long term. Because generally what happens to us is that we have these sort of death by 1000 cuts problems, which is, in the moment, when someone is not quite giving us the terms that are ideal for us we’ll say, “Okay, I’m not going to deal with you, because I think there’s going to be another buyer in the future.” But that buyer is giving you signal about what your business might be worth. Now, it could be that they’re too low, but it also could be that they’re too high and we don’t know.

What’s your thought on speed in decision making as a seller?

If you actually have terms that you both agree on, waiting until the next morning is not going to call the cause the buyer to go away. Now, if you repeatedly do that it will. So what you want to kind of try to, again, figure out in advance is, what’s a reasonable amount of time within this buyer is not going to go away. So let’s say its two weeks or something, then when you feel yourself in those moments where you want to take a break to be able to go and think about it, as long as you’re in that timeframe, just say, “I want to take a break.” And if they say, “I demand an answer now.” Then you say, “Okay, I still want to take a break.”

How often have they actually got away if they’re serious? And I know it feels really bad in the moment, because it feels very, very high stakes, but I can tell you as a poker player, that that’s just such a huge bluff.

How do you avoid feeling as if you’re getting out done by the other party in a deal?

It depends a little bit on how you define the best deal. This is what I’ll tell you, the answer is pretty much always, no, because the best deal that you could get, the buyer is not going to take. There’s always some compromise. The best deal you get, you’re not going to find a buyer for, so you’re probably going to be a little bit below that you’re trying to find the sweet spot between what would the buyer be willing to buy my business at? And what would I be willing to sell it at? And hopefully you can sell it for the most amount that the buyer would be willing to buy it for. But the thing is, you’re not going to know.

And so what you have to do, instead of focusing on did I get the best deal, is you have to set that those boundaries for yourself. What’s the worst deal I’d be willing to take in? What’s my ideal point? Focus on what is my goal price, and what is my absolute basement price. And given my goal price, how far above my goal price do I think that I should start it should be much more than the person should be willing to accept. As long as you do that process correctly, you have no regrets. That’s kind of where I would come at, it should be about the goal of getting as close. We want to get if you can get, above what your goal prices was. If the deal doesn’t fall apart two or three times, you haven’t made your money.

Can you explain why you’re likely to be happier if you only lost $100 versus the outcome where you only won $100?

This is path dependent. I can give you an example from business, but let me give you the example from gaming first. If I walk into a casino and I start off really well and I’m winning $100,000, and then things start to go really badly and I end up only winning 100. I think everybody can do this thought experiment, I was winning $1,000 a half an hour ago, and now I’m winning $100. You’re really depressed, and you go back to your hotel room, and you’re super sad. But if I come in, and I lose $1,000 right away, and then I win back all but 100. So I’m still losing 100, it’s like, “Drinks on me.” So obviously, that’s weird, because in one case, I won 100 and I’m sad. And one case, I lost 100, and I’m happy. So you want to think about that in terms of the way that you’re viewing the sale price of your business.

So you can imagine, if you’re marking the business from some sort of value on paper that was at the high, and then there’s an economic downturn, you’re going to be pretty sad, even if you’re selling that business at quite a bit of profit. Why? Because you’re kind of marketing against the highest point that it was. Whereas, let’s say you’re just coming out of 2009, and you find a buyer, and you could even be selling that business at a loss, but it’s so much higher than what that recent low was, you’ll be happy about it. Now we’d like to actually view it in the way that we should view it, which is not against whatever the path was, but against what the present value today is. And then on top of that, what will happen is you’ll start to price for that.

Is there a tripwire to know when you’re being irrational in decision making?

Yeah, there are a few things. One is again to that advance word, because you’re going to be more rational in advance of the decision than you will be in the middle of the decision. So think about what are the terms that I’m willing to give on? What are their terms I stand firm on? For any of those terms, figure out what the lower bound and the upper bound is for what you would accept on those items. And really do advance work because that’s really, really, really going to be helpful. That’s number one.

Number two is trusted advisors. So present the facts, not your opinions. So you don’t want to go to someone and say, “Here are the facts of the matter. Here’s what they offered me. I think it’s an amazing deal. What do you think?” What you want to say is, “Here are the facts of the matter? Here’s what they offered me, what do you think I should do?” And just leave your own opinion out of it, that’s going to give you the most sort of objective view of your own opinion. That’s number two is to get to other people.

Number three, and this is really important is it’s not just important to think about the work in advance, and sort of think about what would I accept in the future, but when you’re making the decision to say, “It’s a year from now and I’m really, really happy about this decision?” Why do I think that is, “It’s a year from now, and I’m really unhappy about this decision?” Why do I think that is, and that allows, in some sense you to step into that advisor role, because you sort of get separated from the decision, and you’re actually living the, “Boy, I have a lot of regrets a year from now, why do I think that is? Boy, I’m so happy about it. Why do I think that is?” And you can look at that and say, “Well, what do I think the chances are that the world is going to unfold that way?”

For example, it could be the economy boomed and in six months, it turned out that I could sell this business for much more than I thought I could, that might be one reason why you might be unhappy about it. Then you can actually explore that and say, “What are the chances that that’s going to happen? Do I think it’s worthwhile to wait a minute here? Do I think this buyer will still be here in six months? What are the risks, what are the chances, I think it’s going to go down.” And all of those things, when you start to do that time traveling and start to dig into those reasons, just get you into more rational parts of your brain. And it’s just going to make you much less likely to make those irrational decisions. So a lot of the irrationalities come from making the decision in the moment.

Annie DukeProfile Photo

Annie Duke


Annie is an author, speaker, and consultant in the decision-making space and Special Partner focused on Decision Science at First Round Capital Partners, a seed-stage venture fund. Annie’s latest book, Quit: The Power of Knowing When to Walk Away, was released in 2022 from Portfolio, a Penguin Random House imprint. Her previous book, Thinking in Bets, is a national bestseller. She has won over $4 million in tournament poker as a former professional poker player. During her career, Annie won a World Series of Poker bracelet and is the only woman to have won the World Series of Poker Tournament of Champions and the NBC National Poker Heads-Up Championship. She retired from the game in 2012. Prior to becoming a professional poker player, Annie was awarded a National Science Foundation Fellowship to study Cognitive Psychology at the University of Pennsylvania.

Annie is the co-founder of The Alliance for Decision Education, a non-profit whose mission is to improve lives by empowering students through decision skills education. She is a member of the National Board of After-School All-Stars and the Board of Directors of the Franklin Institute and serves on the board of the Renew Democracy Initiative.