This week’s episode is a solo cast where I’m taking the microphone and talking about what it’s going to take for you to leave your business when you want, in the way you want to whom you want. Too often I see business owners like you not be prepared to leave your business. In many cases it’s more than not being prepared, you might not even know what to do.
In many cases it’s more than not being prepared, you might not even know what to do. This is what causes perma-five where you know there are things you need to change, you just don’t know what they are. You might believe that whatever it is that you need to do will magically appear over the next five years and you’ll be able to move on.
The sad news is, this is not likely to happen. Leaving your business and being able to afford to do so is trickier than you think. Listen to this podcast episode and learn what you might be missing.
Here are some of the things you’ll learn in this episode:
- Why your business isn’t going to get you to retirement by itself.
- What are the different values your business might sell for?
- What to do if you’re not happy with what someone might pay for your business.
- How to decide who the next best owners are for your business.
- How to look at your business through the eyes of a buyer.
Narrator: Welcome to The Sustainable Business Radio Show podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. In The Sustainable Business, we focus on what it’s going to take for you to take your successful business and make it economically and personally successful.
Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning and thinking about what it takes to make a successful business sustainable.
Josh: Hey, how are you today? You’re at The Sustainable Business. I’m Josh Patrick.
Today, we’re going to do something a little bit different. Today, I’m going to talk to you by myself. This is going to be a solo podcast. It’s going to be about what you need to get out of your business alive or the private business owner’s guide to leaving your business in style. Now, there’s eight steps that we’re going to talk about today. And we’re going to go through them one at a time. I’ll spend a little bit of time understanding what they are.
At the end of this podcast you’re going to have the opportunity to order our free e-book which is Successes to Sustainability: The Five Things You Need to do to Create a Sustainable Business. And believe it or not, probably the most important thing that you’re going to have to do, to get out of your business with your shirt on, is to do these eight things.
So let’s get started. We’ll jump right in. So step 1, in what you need to do to get out of your business alive, is you need to know what it is that you need. In other words, how much do you need to live on?
You know, too often, I see business owners come up to me and we have this conversation. And they say to me, “You know, I want to leave my business.” And my question becomes, “When?” And they say, “Yesterday.” We both have a good laugh. And I say, “No, really, when do you want to leave your business?” They say, “Well, five years from now.”
And every time I hear that “five years from now” I know there might be an issue around that. And the issue, very simply, is they’re really aren’t unsure what it takes for them to leave their business. And to start with, the folks that I’m talking with haven’t spent enough time thinking about what it is that they need to do to leave their business and to know that they can afford to leave their business. Now, that’s a big, big deal. You need to know what you need to live on every year. So the first thing I want you to do— and this is a really a pretty simple activity. Take out your checkbook and write on a bunch of columns in different areas you spend your money on. Go over the last year. And take your spouse’s and your checkbook, put them together, and write down what you spend.
Now, most people think that that’s the end of the exercise. But if you own a business, you know it’s not. And the reason it’s not is because your business pays for a lot of stuff that you do and that you have for which you need in your lifestyle every year.
So, in other words, let’s say your business pays for your car. Well, you need to take the cost of that car out of your business and put it into your personal expenses. Let’s say your business pays for you to go out to dinner with friends or with clients but they’re still friends and after you sell your business, you’re still going to go out to dinner with them so you need to take that and put that into your personal spending account.
So you want to go through all these things. You want to know what you spend personally and what you spend through your business to support your personal lifestyle and you want to write them down. Now, that gives you a number.
So now you know what you need and you can start to say, “Well, gee, what will my business probably provide me?” And we’ll talk about that in a little bit in a little while.
So once you know what you need, you now have a number. And the issue here, with having that number, is you don’t really know how all the assets that you have fit in together. That’s where a financial plan comes into play with you. It’s really important, before you go down the road of selling your business, that you do some financial planning along with that.
So if you do that, that’s going to help you know what you need. You know what you need to spend. You’ll have done a financial plan of where the money is going to come from. And you know whether you’re on track or off track.
And if you’re saying “five years” there’s a good chance you really don’t know whether you can leave your business. In fact, I call that Perma-Five. And what Perma-Five means is that if I was to come back to you and ask you “what it is you want to leave your business”. You’re going to tell me that “It’s five years away.” And I come back two years later, guess what, it’s still “five years away”. And the reason is you don’t know what it is that you need. So if you do a financial plan, you can help move yourself out of Perma-Five.
So the next thing we want to know is, “what’s your business worth?” And the question, of course, here is “Who’s the buyer?” because different buyers will put different values on your business. We call this “value worlds”. Your business could be worth $200,000. It could be worth $1 million. It could be worth $4 million or even more depending on who the buyer is.
The fact is, the business that you own lives in lots of different values. And the real question that you want to answer is, “Who is the buyer?” “Who is the person that’s going to own your business after you?” And the whole point here is we want to know “what is your business worth?” And the way your business is going to be worth is how sustainable is your business? Meaning, can the business run without you? Does the business have a mission, a purpose, and values that are clearly stated? Is there a recurring revenue stream in your business? In other words, do you know how much business your business is going to do on January 1st every year? And for many businesses, that’s a real challenge.
The fourth thing is, “Is your business systematic enough?” In other words, do you have systems in place so your business can run without you? Now, many businesses that are smaller don’t fit into this realm.
And the fifth thing is, and this is a big one, “Is your business making enough that somebody else would want to buy it?” If your business is just barely profitable, it’s really not saleable for much more than what the asset value of your businesses is. However, if your business is really profitable and there’s enough money for your lifestyle, for you to save for retirement, for money to be put away for marketing and growth in the future, and for an emergency fund – those four things are covered, then your likely going to have a business that’s profitable enough that somebody else would want to buy it.
So let’s go to step 3. Let’s say my business isn’t profitable enough or is not valuable enough and there are things around my business that need to improve before somebody else wants to buy it. Well, that’s where you get to work on increasing the value of your business.
Now, lets’ talk about the process of leaving your business. You know, that process is going to take you a long time. This doesn’t happen in six months. Most people, to get their business ready for sale and go through the sales process and then get to leave their business, it takes them somewhere between three and six or seven years. And the reason it usually takes that long is because there’s usually something in your business that needs to be fixed before you go about trying to get out of it.
So we have a process that we help people go through called the Core Value Process. And what the core value analysis does is we look at 18 value drivers in your business – nine internal drivers and nine external drivers. And we get to rank each one of those on which piece, if we fix it, would have the biggest effect in increasing the enterprise value of your business.
Now, you might decide you don’t want to work on everything and that is true for most people I talk with. So instead of trying to fix everything that’s going on in your business, I just want you to work on one, or two, or three things. And you might find that one, or two, or three things that you work on your business get you 70% to 80%, to maybe 85% of the results of what you can do to increase the value drivers in your business. So it might not take five or six years. It might take only two or three years because we’re going to focus on the right thing that you need to do. And I want you to think about that.
So let’s go on to step 4. Step 4 is kind of an important thing because a lot of people who work with folks in the world of leaving their business go through the smorgasbord of all the things that could possibly happen when you want to leave your business and all the people who are around, who might want to buy your business.
So here’s the thing about that. Your business is not available for every exit strategy there is. So let’s not pretend it is.
So the important thing for you to really be thinking about and the important thing that I want you to be thinking about is “Who’s going to buy this business?” Is it going to be somebody from the outside? Would it be a private equity group? Would it be a competitor? Would it be a really big company that wants to get your technology and your intellectual property and expand it across theirs?”
So you have to decide “who is the likely buyer for your business?”, if you want to sell it to a third party. That doesn’t mean you’re going to sell it to a third party. It just means it’s one of the options there.
Let’s say you don’t want to sell it to a third party because you want your legacy to stay intact. The truth is, if you sell your business to a third party, there’s a very good chance that all the stuff you built and all the systems you built will be rapidly taken apart. After all, if you are going to buy someone else’s business, would you want to use their systems or would you want the business to adopt your systems? And my suspicion is, you would want the business to adopt to your systems. Well, guess what, the same is true for anybody who buys your business.
So if you don’t want that to happen, the other option is – well, there’s a couple of other options, is “gee, do I have managers that are capable of buying my business? Do I have managers that are willing to take the debt on to buy my business? And do I have managers who are willing to personally guarantee any notes I sign with them to buy the business? Because, let’s look at the facts here, if you sell your business to your managers or you transfer your business to your family, guess what’s true? Neither your manager nor your family will have enough money or enough resources, or go to a bank and borrow all the money they need.
So it’s really important for you to remember that if you’re going to be selling your business to your managers or your family, you have to have them both guarantee that they are going to pay the note to you or there’s going to be economic pain for themselves. If you sell to your managers, I believe, you have to get them to personally guarantee the note and their spouses to personally guarantee the note. And if you sell to your family, you want to be able to take that business back if your family isn’t doing a good job of managing the business.
And then finally, there’s another way of getting out of your business. It’s one that most people don’t want to consider. But for some people, it’s the best way to leave their business. And that’s through liquidation.
Let me tell you a story. My sister used to own a retail clothing business in downtown Burlington, Vermont. And several years ago, she decided it was time to close up her business and move on to the next thing she wanted to do in her life. So she looked at two options, (1) Was she going to sell the business? (2) Was she was going to liquidate the business?
Now, when you hear the word liquidation you’re probably thinking “Oh, I don’t want to do that. That’s a bad choice because that means I did it wrong.” Not necessarily, if you’re in the right industry. She was in the right industry. Buying a bunch of clothes out merchandising, going through a liquidation sale created more money in her pocket than she would have had had she sold the business. And on top of that, when she closed the doors, she had all the cash she was going to get.
If she had sold that business to somebody outside because of the size of business and the type of the business that it was, she was going to have to probably hold a lot of paper which, again, is a huge risk. When you hold paper for a seller, you have a risk that lots of sellers don’t have as long as you get cash. But you’re not getting cash. You’re holding paper. And you don’t want to do that. So that’s step 4.
So let’s move on to step 5. Step 5 is keeping your key people. And this is really more important if you’re doing a sale to your managers, your family, or even a third party sale.
Let’s face it. If you’re selling your business to a third party, no matter what they say to you, they’re not really interested in you. What they are interested is your business, your cash flow, the systems that you have to run the business, and the key people in your business.
Now, what’s keeping those key people around? Most of the time, the answer to that is nothing. But we have something that we like to see people do when they’re selling their business or thinking about transitioning their business. And in fact, if you’re not going to transition your business, I call this the emergency plan if you happen to get hit by the bus. And that’s what we call the stay bonus.
And a stay bonus, very simply, is if I have a triggering event happen like I die or become disabled and you stay on for a particular period of time, you’re going to get a bonus. If I sell the business, whether I sell the business internally or I sell the business externally and if you’re not involved in the ownership of the new business, you’re going to get a bonus if you stick around for a period of time.
Now, I’ll tell you, when I sold my vending business back in 1995, the buyer wanted to come to me and they wanted to say, “You know, we can’t pay you all. We thought we were going to pay you for your business.” I said, “Well, why is that?” “You only have employment contracts.” I said, “Aha, but that’s not true. I have a stay bonus for all my key people. So if they stay with you for a year. They’re going to get six months’ salary.” Oh, by the way, that stay bonus comes out of your pocket, not the seller’s pocket. But as a result of me having that stay bonus in place, I got significantly more money for the business than I would have had had I not sold the business.
So step 6 is protecting your asset. Now, this kind of falls into two pieces. The first is, I’m going to sell the business and I’m not going to get an all-cash deal. I’m going to be holding paper. I’m going to be becoming the bank for the buyer. It might be an external buyer. It might be my managers. Or it might be my children. But if I’m going to hold paper, I need to secure the loan. Meaning, you need to secure the loan just like you’re a bank.
And you know what? For all intents and purposes, you are the bank. You’re the one providing the financing. You’re the one who’s making it possible for the new buyers to come in and buy your business. So if you’re holding paper, act like a bank. Make sure those who are buying the business from you personally guarantee the note. Make sure the people buying the business from you are putting a house up as collateral. Make sure the person buying the business from you is willing to put some real skin in the game saying, “If the deal doesn’t work out, they are going to have a financial mess along with everything else.”
Now, the other part of protecting your asset, and you should be doing this right along the way, is protecting your asset from lawsuits. Now, people will tell you that business owners get sued all the time. And that does happen a lot. More than if you’re just working for General Motors or General Electric or any of the Generals in the world. And you’re not likely to be sued as much as if you own a business.
So if you own a business, make sure that businesses is protected properly. Meet with your attorney. Find out what the things are that you need to be doing to protect your asset through your attorney so they’ll know what you’re doing.
Step 7 comes along. I’ve sold my business. I’ve got this big pot of cash. And that big pot of cash means I need to learn how to invest it.
Now, let’s talk about how you’ve been living your life. You’ve been living a cash flow life, meaning that your business produces a certain amount of cash flow this year and you live on that cash flow. But when you sell your business, you’re no longer going to have an active cash flow around unless you have rental real estate that the buyer is going to use and pay you rent for. But otherwise, you’re going to get a big pot of money. You’re going to pay some taxes. And you’re going to pay some expenses. And you’re going to be left with that big pot of money.
Well, you’ve probably never had to invest that much money at one time. Yeah, you may have managed your 401K plan and you probably had somebody doing that. But well before you leave your business, it’s important for you to know about how you’re going to invest the assets. Are you going to manage that money yourself? Or are you going to hire a financial advisor to help you? Or are you going to manage the money yourself and hire a financial advisor to give you some advice about it along the way? There’s lots of options to go into about how you’re going to manage your money. What it really comes into is, how do you move from being a good business owner that works on the cash flow basis to being a good manager of cash and assets to create enough income for you to live on on an annual basis?
And, finally, we get to step 8. Step 8 is just a really big deal. Step 8 is such a big deal that I want to spend a minute or two just talking about this as a whole thing. You know, so what’s next question? It means, okay you sold your business. Now, what’s going to happen when you sell your business?
What’s going to happen when you sell your business is the phone is going to stop ringing. All those people who were your friends and still would like to be your friends, but frankly you just moved off the radar screen. Think about your own life. When someone has sold their business, they move out of your radar screen. You don’t think about them every day. You don’t talk to them every day because they’re not in the same place. You probably stopped contacting them. You mean to contact them but you just don’t ever get around to do it. And after six months, a year, or a year and a half, too much time has gone by and you feel embarrassed and you don’t call them. Well, guess what, that’s going to happen to you. So unless you have a really compelling future about what’s next in your life, there’s a really good chance that when you sell your business you might get what’s called seller’s remorse.
And seller’s remorse, very simply, is I’m sorry I ever sold the business. My life isn’t very good. I don’t know what I’m going to be doing in the future. And boy, I wish I still had my business because it kept me busy.
Playing golf, going on vacation, going fishing is not the answer. Yeah, you’ll do all those things but you need to have a compelling future. Is it doing volunteer work? Is it starting another business? Is going back to school? Or is it writing a book and becoming author?
There are lots and lots of options for you to think about, about what you want to do after you get out of your business. But please, please spend some insignificant time talking about it with your spouse, talking about it with your friends, talking about it with your financial advisor, talking about it with anybody who would have the conversation. And, especially, make sure you talk to other people who have sold their business. Ask them what they would have done differently if there were to do it over again.
So there are the eight things that you need to be thinking about to sell your business. So let’s go over them really quickly again. (1) What do you need? What is the amount of assets that you need for you to live comfortably after you sell your business? (2) What’s your business worth? In other words, what value world is your business likely to live in based on who you’re going to sell it? If the value world’s not good enough, (3) how do you increase the drivers? Well, we recommend doing a core value analysis, looking at nine internal and nine external drivers, and choosing the three things that work. (4) Who’s going to buy it? Are you selling it to an external buyer or a third party? Are we going to do an internal transition to my managers or my family? Or is liquidation the right choice? (5) How are you going to keep your people? I encourage you to go to our website, put in the search box “stay bonus”. You’ll find lots of articles about the “stay bonus” and how it can be applied to you. (6) Protecting your asset. If you hold paper, what do you need to do to protect your asset? How do you protect yourself from lawsuits? Those are the two things you need to think about here. (7) Investing the proceeds. You’re going to be moving from a cash flow economy to an asset-based cashflow economy – two very different things. And you need to learn about the asset-based cashflow economy which is investing your proceeds. And then finally, (8) what’s next? What are the things that are going to happen in your life to keep you from getting seller’s remorse? So those are the eight things that you need to do to sell your business.
Now, below this podcast, you’re going to see an offer to get our e-book, The Owner’s Guide to Leaving your Businesses in Style. This goes in depth into the eight things that we talked about today. I hope you take advantage in getting it.
And, if you’re interested in getting our free 1-hour audio CD – and this is free, I have a really simple way for you to do that. Just take out your smartphone. And please don’t do this if you’re driving. But take out your smartphone and text the word SUSTAINABLE to 44222. That’s SUSTAINABLE to 44222.
This is Josh Patrick. You’ve been at The Sustainable Business. Thanks so much for spending some time with me today. I hope to see you back here really soon.
Narrator: You’ve been listening to The Sustainable Business podcast where we ask the question, “What would it take for your business to still be around 100 years from now?” If you like what you’ve heard and want more information, please contact Josh Patrick at 802‑846‑1264 ext 2, or visit us on our website at www.askjoshpatrick.com, or you can send Josh an e-mail at email@example.com.
Thanks for listening. We hope to see you at The Sustainable Business in the near future.