Getting the Owner Ready

There are three things that require your attention to sell your small business:

1. Getting the owner ready
2. Getting the business ready
3. Getting the buyer ready

You might think that all of these are already as ready as can be or it is not your responsibility. There are almost always things you can do to make it better. Remember, selling your small business to your employees is dramatically different from selling the traditional way to a third party.

Almost all the conversation surrounding getting the owner ready centers on the financial aspect. That is of course important, but not typically what sellers struggle with the most. When you retire, you really retire three times:

1. Financial retirement
2. Physical retirement
3. Emotional retirement

That last one, the emotional retirement, is the one that gives the most trouble and the one getting the least attention.

How to Retire Happy, Wild, and Free: Retirement Wisdom That You Won't Get from Your Financial Advisor

Most of the retirement conversation centers on the financial retirement, but the one that causes the most trouble especially for small business owners is the emotional retirement. Many are simply unprepared for the dramatic change this is and often find themselves trying to find their way back into business. Make a plan. Spend some time training a successor and try it out before you take the plunge.

Ideal Candidate for Conversion to Worker Ownership

If you look at the landscape of business owners, you will quickly realize that they are not all the same. At one end of the scale are the people who run a small business as a side hustle or even as a full time occupation, but they never hire anybody. They usually stay small, sometimes because they like it that way. This is by far the largest group of owners.

At the other end of the scale are the entrepreneurs who have built a business from scratch and now use other people's money to grow it beyond what he could have done alone. These are the ones who eventually sell for some ridiculous multiples. This is the smallest group of owners. Only few are able to achieve this. When they do, they sell and then often do it over again.

In between these extremes are the small business owners who just want to escape the shackles of a regular job. John Warrillow, author of Built to Sell: Creating a Business That Can Thrive Without You by John Warrillow (28-Feb-2013) Paperback, calls them Freedom Fighters and that's what they are. They value their freedom to live their lives on their terms sometimes even if it means making sacrifices in other areas of their lives.

They comprise about 25% of the owners and have revenue of roughly $500K to $10M. They do typically hire at least some employees and sometimes grow to significant size. They typically rely on their accountants and lawyers for advice and sometimes other entrepreneurs like themselves. Growth is often on their minds, but they cannot quite make it happen preoccupied as they are with day-to-day operation. They typically hold on to it for decades. They rarely sell it until they have to and rarely make plans ahead of time for how to go about it.

In one respect they resemble their self-employed brethren: They are firmly in control of their business. They do not share decision making with anyone. As a result, just like them, the business cannot run without them. It totally depends on their presence day in and day out and that is a problem. It makes the business unsalable, particularly the smaller ones. No one else can step in and successfully run it. Everything will grind to a halt should the owner suddenly leave which happens in a lot more cases than you might think.

That makes them perfect candidates for conversion to worker cooperatives

The workers are the perfect buyers. They already know how to operate the business. They are concerned about the alternatives, loosing their jobs or have them changed by a new owner. The biggest obstacles are 

• Leadership and 
• Financing

One of the reasons their serial entrepreneur colleagues are able to start and grow multiple businesses is their ability to see the big picture. Unlike small business owners who remain small, they are visionaries who rarely get bogged down with the details. They hire people to do that.

Small business owners tend to have tunnel vision focusing on the day-to-day and tend to overlook the obvious and therefore frequently dismiss ideas like selling to their employees without even considering the possibilities. How we solve these obstacles will be the subjects of other posts, but now at least you know who the best candidates are.

Related article:
Is Employee Ownership for Your Company?

Built to Sell: Creating a Business That Can Thrive Without You by John Warrillow (28-Feb-2013) Paperback

Warrilow tells the story of a fictitious heads-down small business owner as he gets mentored into a heads-up owner who successfully turns a struggling business into a salable one.

Startups and Mature Businesses Require Different Strategies

Most business owners treat their businesses as a way to make a living or an alternative to a job. They rarely treat it as a way to build wealth. Well, they do think about that, but they do not act like it. Let me explain.

Most business owners will tell you that they expect their business to fund their retirement. They typically have 80 to 90% of their wealth tied up in their business except they have no idea what the business is actually worth. They may tell you that so-and-so sold his business for x times earnings, EBIDTA or some other popular measurement of success. That may be so, but they conveniently forget to tell you that this other business was built to sell, not to make a living. And that is what this post is about.

You see, a business goes through several stages over the owner's lifetime, much like any other baby does. If you treat it the same way all this time, it will not grow up and become mature and ready to sell.

A lot of businesses begin their life as startups. During the first few years, it will need a lot of feeding and nurturing. Then, when all the startup debt has been paid off, comes a period of growth. Swept away by its success, the owner plows every penny back into the business riding the momentum of unbridled growth. You can think of this as teenage years perhaps. At some point real teenagers grow up, become mature, get an education, start families. Many businesses do not. Owners of mature businesses often forget to let them grow up. There are several things they neglect to do. First, they forget to accumulate funds outside the business. Second, they forget to let go of the reins.

Almost every business owner will tell you that whatever you are trying to do is much more likely to succeed if you have a plan. Nevertheless, very few of them actually have an exit plan and that is not good because we know that all of them eventually will exit. What is worse is that an alarming number of them say they do not have to do anything in order to exit. They can do so immediately without any preparation whatsoever. They are likely to be in for a rude awakening.

Exit Planning - Four Fundamental Questions

Exit planning involves three distinct tasks:

1. Get the owner ready
2. Get the business ready
3. Get the buyer ready

Unless you are one of those business owner who does not think it is necessary to plan for your exit, it is easy enough to understand why you need to do a little prep work to get the owner ready and to get the business ready, but why do you need to get the buyer ready? Well, maybe you do, maybe you don't. It definitely pays to think about who will take over. Different kinds of buyers have different goals so if you can decide early on who is the most likely candidate, there is a lot you can do to make the business attractive to a particular type of buyer.

The kind of buyer most owners overlook the most are their employees. Granted, more businesses pass to employees than to any other buyer group, but it is usually a few managers or trusted employees who take over, often because the owner failed to sell it to a third-party and needs a Plan-B. Broad-based employee ownership is still quite rare but gaining in popularity. There are two kinds, well three if you count Employee Ownership Trusts (EOTs). There may only be a handful of those in the U.S.

First, there is the Employee Stock Ownership Plan (ESOP). It is basically a pension plan and very complex and expensive, well out of reach for the typical small business.

Second, there is the worker cooperative where all or most of the employees buy one share and run the business democratically - one person, one vote. 

Both ESOPs and worker cooperatives qualify for deferring Federal capital gains tax, but the rules are strict and hard to comply with.

Become Employee Owned

Business Development: A Guide to Small Business Strategy

Every business goes through a number of stages during its lifetime, or it should, but sometimes the owner keeps treating a mature business like it is still a baby. It never grows up and matures. It never accomplishes the goal of providing for the owner's retirement. That happens because the owner started it to make a living, not to build wealth and never got around to switching strategy to be able to sell it.

How A Child's Place Became Worker Owned

This video shows how A Child's Place in Queens, New York was founded and later converted to a worker cooperative. The owners' reason for selling to their employees was clearly more values based than financial. It was important for them that children could continue to receive quality care, the same reason it was founded in the first place.

It would be easy to think that selling to your employees would mean you would have to make a financial sacrifice. That is not so. A valuation will be made and provided the business is healthy and able to support the debt burden, there is no reason to sell at a discount. On the contrary, employee buyers are more motivated than any other buyer you can find. They are more likely to pay fair market value than anyone else.

Convert an Existing Business to a Worker Cooperative

If the business is not ready to be sold, there may be things you can do to make it salable. One of the easiest ways to increase the value of a small business is for the owner to assign responsibilities and leadership to managers. Another is to document systems and processes. With these two value drivers in place, the business should be able to run without the owner's constant presence.

Is Your Business Salable? Is it Profitable?

Building Co-operative Power: Stories and Strategies from Worker Co-operatives in the Connecticut River Valley

It is no secret that a group of people can achieve more than the sum of their individual effort. That is what cooperatives are about. When cooperatives cooperative with other cooperatives, you have virtually unlimited potential.

This easy to read book gives you an introduction to worker cooperatives, but also uncovers what is potential of cooperatives working together to achieve their common goals.

Exit Planning - Four Fundamental Questions

Retirement planning begins with you. What do you want your retirement to look like? Once you have figured that out, you can expand the circle and include your spouse, your children and other stakeholders you think may have an interest in your retirement such as your employees.

There are four basic questions you will need to be able to answer:

1. When do you want to retire?
2. How are you going to live?
3. What will you do?
4. Who is going to take over?

The timing can be anything you decide it should be. Attaining a certain age could be one, but it could also be an event like the independence of your last child, being eligible for social security or medicare. Make that decision and then make everything you do a step towards that goal.

Decide what kind of lifestyle you would like to have. Are you going to travel a lot? Will you downsize your residence or move somewhere else? Build a diversified portfolio of funds that will be there when you need it. The riskiest one is your business. Do not rely on it alone for retirement funds. Make sure you have at least some funds outside your business, preferably enough to retire comfortably without relying on the sale of the business. 

As a business owner you may have been intensely focused on building it. What are you going to do when it is gone? Will you have a social network? Will your life still have purpose? How will your spouse feel about having you around all day?

And most importantly, who is going to take over? Only 20 to 30% of all transitions are successful, so it is necessary to have a Plan B here. Children are less likely to take over than ever before. A third-party sale is unlikely unless you have something really unique or valuable. The most common transition is a management buyout and, finally, the least attractive one, liquidation. A variation of the management buyout is the worker cooperative where all or most of the workers become owners, not just the managers. That could be your best option as it spreads the risk on more hands.

Convert an Existing Business to a Worker Cooperative

The Conversion Process

The Business Owner's Guide to Financial Freedom: What Wall Street Isn't Telling You

Retirement for business owners like any other retirement, but, yet, it is very different. As a business owner, you have far more options available. Most business owners have not thought much about retirement. This book makes it easier to make intelligent choices.

Is Your Business Salable? Is it Profitable?

Employee buyers are no different than other buyers. They want value for their money just like everyone else. If you cannot deliver, then, they should not buy your business.

So what makes a business salable? Let us look at what you are selling:

First, you are selling the tangible assets of your business such as equipment, vehicles, tools, trademarks, intellectual property, etc. Second, you are selling intangible assets such as its reputation, clientele, position in the marketplace, etc. Do any of these things have value? Will it be enough to meet your goals?

The most important thing employee buyers will be looking for is leadership. Can the business continue to run without you? The second thing they will be looking for is its ability to make money. Will they continue to get paid if they buy it from you? Is it profitable? How profitable? Will it continue to be? If the answers are less than stellar, you have a decision to make. Do you try to improve before the sale or do you just sell as-is and accept that the price will be lower?

Almost every sale involves some kind of seller financing. That means that you are not going to get paid for a while. The sale of a business is often a major upset. There is always a risk that the newly sold business will be less profitable immediately following the sale. There is a chance that you may not get paid. Therefore, it is always safer to fix any problems before the sale than after. Fixing problems does not happen overnight, so it is important to make this decision early on and get started doing it.

Many business owners put a great deal of effort into increasing sales and that is great. That is how you generate revenue, but that means very little if the cost of generating that revenue is out of control. With that realization, many business owners then go on a cost cutting rampage and are surprised when the profits aren't materializing. Cost cutting can be a double edged sword. If quality suffers as a result, your reputation might suffer and that can be really difficult to fix.

A better approach is to decide what products or services and what customers are most profitable and then focus on just those. Eliminate anything that is questionable. Once you have decided on the products and customers, you need to adjust your marketing efforts to more precisely hone in on the most valuable customers.

Some buyers, employee buyers definitely, will need outside financing and whoever is going to put up the money is going to want to see some evidence that your efforts are paying off. They are going to want at least three years of financial statements, so you can not wait till the last minute to get started. Lenders are lenders no matter who you sell to and they all have the same requirements.

Exit Planning: The Definitive Guide

Certainly, you can sell your business on your own, but getting some help is almost always required. Somehow, the professionals begin to run the show for you. This book gives you enough information so that you can remain firmly in control of what is going to happen.

Retirement Planning for Small Business Owners

You might be young and think that retirement is way out in the future. Reality is that the future could come sooner than you think. A lot of retirements are involuntary. Retirement does not always happen at the time you are ready. Yes, I know growing your business takes priority right now, but every step you can take to deal with the unexpected and even the expected will only help.

As a business owner, you might think that your business will fund most of your retirement and it certainly could, but it is very risky to rely on just one source of funds. We will take a look at those alternatives a little later, but since your business is your main priority, let us begin with that.


Your Business
If your business is to have any value as a retirement vehicle, it needs to be salable. If nobody wants to buy it, you cannot unlock the value you have accumulated in it. Selling the assets, liquidation, is the option the least likely to yield the kind of cash you had expected. There are a number of things you can do to make it easier to attract a buyer on short notice if you have to.

• Always be prepared to sell
• Always have clean books
• Create systems and processes so it can run without you
• Find out who your most profitable customers are
• Diversify. Do not rely on just a few large clients
• Have long term contracts with clients and vendors
• Focus on most profitable product or service
• Brand. Be the go-to place for whatever you are selling

To put it more briefly, be a business owner, not self-employed.

The Alternatives

About the time your new business is profitable and you can pay yourself enough to make a modest living, it is time to begin accumulating assets outside your business. There are many ways to do this. Some of them are quite creative, but often amount to starting another business. Do not do that until you have enough funds for the kind of retirement you want. Then you can do whatever you want with your spare change and your spare time. The idea is to soften the blow as much as possible in the event something catastrophic happens.

• Accumulate enough cash to cover your living expenses while you sell your business
• Accumulate funds in medium and long term work-free tax advantaged retirement plans
• Fund other goals such as college plans for your kids, home and/or car
• Get an estate plan

Whatever you do, do not listen to investment gurus. Get educated, yes, but do not let yourself get distracted from your main job, to build a valuable business. Plain and simple is the best strategy. Stay focused. Retire early. Then you can go wild.

Passive Income - Fact or Fiction?

How to Make Your Money Work for You

How to Retire Happy, Wild, and Free: Retirement Wisdom That You Won't Get from Your Financial Advisor By Ernie J. Zelinski

Almost all the retirement advice you find is focused on the financial aspect of retirement planning, but that is actually the least important for business owners. Business owners are driven by purpose far more than other people and when that purpose suddenly goes away in retirement, many slip into depression and all kinds of other problems. How to Retire Happy Wild and Free helps you identify that new purpose for you. Retirement is supposed to be the best years of your life.