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.

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.

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.

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.