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.

Different Buyers, Different Perspectives

As a typical business owner you probably have not thought much about who will take over when you make your exit. It may be tempting to simply target everyone with a pulse, but that would be a mistake. You should know that already because every business plan manual tells you to know who your customers are, what they want and then give them that. Selling your business is no different. So let us take a look at some different potential buyers and what they are looking for.

Employee Buyout

Management buyout, when a small group of key employees or mangers buy the business from the owners, is a very common scenario in the small business space. Some of their primary concerns may be job security or job stability. They want to keep their jobs and they should not change too much. The big change is that you will leave. Suddenly, all the things you used to do will fall on their shoulders. Reality is that they are not prepared for that. You need to think about how you can close that gap and convince them and any other stakeholders that you have done so; that everything is going to be fine.

Family Members

Selling to family members is still a common but shrinking scenario in the small business space. The major challenge is to keep the peace if there are multiple stakeholders. There may also be a preparedness gap to close, perhaps even reluctance to step up and take over. The goal will typically be to provide stable income for them and to preserve a legacy of hard work. Tax considerations are also high on the list when selling to family members. That is mostly your concern, though, not theirs. It is still important to keep focused on what their needs are.

Third-party Buyers

There are several kinds of third-party buyers with different goals and expectations. Some may want to continue your business as is because it fills a gap in their own product or service lineup. Others may simply acquire the assets and integrate it into their own. Some may consider it a long-term investment for passive income. Others may consider it a short-term venture to realize a quick gain. 

Conclusion

All of these different buyers will have different objectives. It is possible that you can find a buyer who is just dying to get a business just like yours the way it is, but that is unlikely. Chances are that there will be gaps between what you have and what they want. Therefore, the process begins with determining what you have. Then figure out who would be most likely to want something like that and, finally, make it irresistible by closing any gaps between the two.

Most of the steps to do that take time so knowing when you want to sell and to whom can make a big difference.

The Intelligent Exit: The Business Owner's Guide To A Winning Strategy For Selling Your Business

Selling your business is likely to be one of the largest transactions you will experience in your life. The stakes are high and a mistake cannot be undone. You only have one chance to get it right. Most other business owners totally ignore preparing for their exit, but you will be well prepared when the time comes.

You will know what you will be doing with your life and how you will live. You will have a salable business so you can unlock the value you have worked so hard to build.

Would Your Employees Want to Buy Your Business?

Preparing Your Business for Sale

Well, of course they would, you might think and that is understandable, but not necessarily true. You may consider yourself to be pretty objective, but chances are that you are far more guided by emotion than you think. The same goes for your employees, but unless you have cultivated a uniquely cooperative corporate culture, their concerns are different from yours because their perspective is different. Chances are that they will be far more emotionally detached from the business than you are. They may consider it just a job that puts food on the table. Some might even dread going to work at your place every day.

Lots of surveys have attempted to uncover what employees are looking for in a job and pay is not always at the top of the list. Faced with the possibility of becoming owners, chances are that the question of how it will impact them financially suddenly moves up that list. They are going to want to know if they will continue to get a paycheck.

There are industries where employees are well paid, but many are not and most of the purchase price will have to be financed either by you or someone else. No matter who finances the sale, they are going to want to know that they will get their money back.

Therefore, the question for you shifts from if they want to buy it to can they buy it. They may not value the benefits of owning their own business as much as they value their paycheck and it may be more attractive for them to go work for someone else. If it can't pay their bill, it has no value for them. Likewise, if the bank can't get its money back, they will not finance the sale.

So what do you do about it? Basically, you would have to do the same things you would have to do to sell it to a third-party. You have to make sure it makes financial sense for them and you do that by installing value drivers and we are going to talk more about them in future posts. All of these things take time. You simply cannot start early enough. Do it today.

Business Exit Planning: Options, Value Enhancement, and Transaction Management for Business Owners

The truth is that most business owners are woefully unprepared for their exit. Most fail. Too many end up closing leaving the owners with very little to show for a lifetime of hard work they thought would finance their retirement. Even if your buyers are your employees, they, like any other buyer, are going to want to buy something that has value. This book will teach you how to sell a valuable business.

Is Employee Ownership for Your Company?

Introduction

As a matter of principle, there are few limitations on the kind of business that can be employee owned. The limiting factors are mostly factors that apply to all businesses. A business that cannot provide enough income for its owners and employees to survive should either be revived or be allowed to close. Let us look at some of these factors:

Culture

Does the company already have a culture of unity, collaboration, corporate pride and strong morale? It is possible to convert a business with a tradition of authoritarian and vertical leadership. It just takes a little more time and effort than if those things are already in place.

Health

Is the business financially healthy? Is the industry contracting or expanding? Is there a lot of competition? Does it have a process for acquiring and retaining customers? Does it have a diversified customer base? Is it dependent on the owner’s presence? Can the business generate enough income for the employees to live, pay off the owner as well as any outside financing? If there are concerns in any of these areas, can they be remedied? How long would that take?

Other Exit Options

Are there any better options such as family members, management buyout or sale to a third-party? What are the tax ramifications of all of these options?

Employee Readiness

Are key employees likely to remain with the company after conversion? To what extent will they be able to run the company on their own? What is needed for them to be able to do that?

Customers

Are customers likely to remain with the company after conversion?

Owner Role

Is the owner willing to take on the additional educational tasks needed for a successful transition? Will he or she be willing to stay until company has been stabilized under new management?

Conclusion

You have probably realized by now that whenever adjustments have to be made, they take time. Therefore, scheduling enough time will increase the chance of successful conversion.

Although it may be possible to rescue a business that has been neglected, is declining or even failing, the chances of a successful transition increases dramatically when those issues are addressed ahead of time instead of after.

Exit Planning: The Definitive Guide

Selling to your employees is in many ways similar to exiting any of  the traditional ways. You still have to set some goals for yourself. You still have to have a salable business with transferable value. Most of the things you have to worry about apply to the sale of any other business.