Derek: you know that your company culture, your company values, uh your place in the community are able to stay the same. And so that gives you a certain amount of emotional comfort that you did a job well and you left your business well. You're there to coach that co-owner, making sure that they really understand how to make the business successful for the long term. We don't want to give up financial control [music] until we get fully paid. And so you can structure the deal in a way that allows you to do both. [music]

Everybody leaves their business. You leave it by death, you leave it by disaster, or you leave it by design. My name is Derek Moffet. I'm a certified exoplaner and a certified financial planner. And welcome to the Leave My Business Well podcast, where we're going to talk about how you can leave your business by design and flourish in retirement and for generations.

Today, we're talking about one of the smoothest types of exit that you can do. It's leaving your business to a co-owner. Now, you can think of this as often a common strategy where people have a junior partner that's in the business, maybe somebody a few years younger than them that they raise or often that they bring in for this very purpose of leaving their business to their co-owner. And this is a great way to do it because your partner runs the business with you. They understand the business. They know your customers. They know your culture. They know your employees. And so, it makes for a really good type of transition. So today we're going to cover this transitioning to a co-owner. We'll talk about uh why it's a smooth exit. We'll talk a little bit about some hidden traps that you may want to avoid. And then at the end we'll always wrap up with the personal financial planning tip.

You know, one of the best advantages to having a co-owner is that you have a built-in exit plan. And as I said earlier, these are people that work alongside you. They know your business. They understand how it works. They understand what makes the business tick. They understand your customers and your values. You know, in our exit planning experience with clients, we often find that that owners don't always want the highest price for their business. Sometimes the secondary priorities of pro uh uh protecting their culture and protecting their company values, protecting their role in the community is more important than getting the highest price. So often when you're leaving your business to a co-owner, it's a little bit of a trade-off. You're probably not going to get that maximum price like if you would sell it out to a um to a third party, but you are going to be able to make sure that you preserve what you've worked so hard for. And that is that company culture and value for your employees, your clients, and also for the community.

You can think of it like this. It's like teaching someone how to drive the car when you're in the passenger seat. You're still in the car. You're watching them. I remember doing I have five children. We've taught them all how to drive. And riding in that passenger seat is so important because you can say don't turn there or stop or whatever the case may be. You're able to coach them as they run and leave that business to make that a smooth handoff uh without just handing them the keys and walking away and hoping for the best. It's a great way to transition to your business. It works because the lo the the second generation learns how to run the business, its people, its systems, its processes with you there to guide.

You know, I remember John Maxwell saying one time that the way that you train somebody well is that that that you know, I do and you watch and then you do and I watch and coach you and then you do and I'm still present but I debrief afterwards and eventually you do. And I think it's a great way if you think about running your business way that kind of shows you how that handoff you're there to coach that co-owner making sure that they really understand how to make the business successful for the long term. Uh, and the best thing is you've really created your own market. You don't have to go out and find somebody else. You're not paying fees to a broker uh when you sell the business. So, again, it's a nice smooth handoff if done well and done right. This is what I call leaving your business by design and not by chance.

Let's talk about some of the advantages with this type of transfer. You know, first, familiarity. Your co-owner knows and understands your business. They understand your systems. They understand your clients. They understand your customers, your vendors, all the operations that make that business work. And so that familiarity means it's a little bit of an easier handoff when you when you transfer the business over time. Number two, speed and efficiency. You know, it's it's like selling your house to a family member. They know all the hidden things in there already. It makes that transition super easy.

Continuity. That's a huge benefit. Your employees are going to typically feel safe in this type of transition because they know the new buyer. They know how things everything stays the same. There's not this major transition or change and you can be phased out over time which really makes it well simpler negotiations is another advantage. It's just easier because again all the parties know each other. They're already familiar. We know what we want. We know what we're trying to achieve. And so sometimes the negotiations can be quite a bit simpler than if you're dealing with say private equity and lots of attorneys and lots of lawyers. Those get way more complicated.

And then emotional comp comfort. you can be confident that your business, all this hard work that you've put into your business is still going to be there when you leave. When you finally finally pass that baton and give it to the next owner, uh you know that your company culture, your company values, uh your place in the community, you're able to stay the same. And so that gives you a certain amount of emotional comfort that you did a job well and you left your business well.

Now, with any type of business transition, there's always advantages and there's always disadvantages. So, let's talk about some of those hidden traps that might be there when you're negotiating or you're working with that uh co-owner. One of the most common is simply valuation disputes. It's easy to think the business is worth one thing, another person has an idea the business is worth something else. And so, you can get into this dispute about what is the company really, really worth. And often when you're doing these type of inside transfers, you're really making the transfer work. You're buying out using cash flow. Again, when you're doing these types of inside transfers and cash flowbased financing, if you will, then valuations tend to be a little bit lower than what you might get if you were selling to a strategic buyer, to a third party or to a, you know, private equity or something like that. So, you have to be in you have to be realistic about the valuation. I recommend using a a good qualified professional evaluator to come in and give you a good idea of what the business is really worth and so that you and the co-owner can be at the same page.

Financing challenges. You know, one of the things people often say is, "Derek, my employees, my my co-owner can't afford to buy the business." So, sometimes there are some financing challenges there. There's a couple things you can do. You can self- finance with the sellers's note. And there comes some complications with that. You know, one of the rules we always say is we don't want to give up financial control until we get fully paid. And so, you can structure the deal in a way that allows you to do both, but it's important that you take some time to plan and understand what those financial challenges might be. you know, your co-owner may not be bankable. They may not be able to go get a bank loan. Sometimes they can, and that becomes a great way for them to buy the business. So, lots of things to think about when it comes to finances. And again, this is why even in a co-owner transfer, I think planning five to seven years in advance lets you really prepare both you and that co-owner for that transition. So, for example, let's say you start planning seven years in advance and you know by year four you're going to start that transition out process. Well, that person could be cleaning up their personal finances. they could be making sure they've got everything, you know, in line so they can go out and get that bank loan. Time is one of your most important assets in any type of exop plan that you do. The longer that runway, the more successful you're going to be and the more options that you have. So, it's important to keep that in mind.

Uh limited market is an issue is kind of a disadvantage. You know, sometimes you can get into when you're selling to third parties, this competitive kind of auction where you've got multiple people bidding for your business and they're bidding that up. When you're selling to a co-owner, you don't have that. your limited market is that co-owner there. And so, one of the advantages is you can use some discounting techniques to be able to uh transition that business at a lower price to the buyer. And you there's some other techniques you can use to make sure you're fully compensated, but you've got a limited market. You're not going to get the maximum price. That's the trade-off that you make. You're going to preserve company culture and values, your employees, and your clients and your community interest in exchange for a lower price. probably at the end of the day uh it can be emotional. There's often emotional complexity. Uh we had some clients that we worked with where the younger partner was, man, he was ready to go. He was great. He was enthusiastic. He's ready to kind of put his stamp on the business and the older partner as he's exiting feels just a little bit um kind of thrown to the wayside a little bit as the as the young buck is ready to go and run off with the business and and and sees the day, so to speak. It can be tough. It can be tough because often that junior partner has ideas and changes and things they've been wanting to do for a while. They've been constrained by that senior partner's ownership and and and really authority in the business that begins that dynamic changes. It can be tough emotionally. So, you still have to work through that emotional transition.

And like a lot of exits, what we find is that owners have spent their life creating these businesses. business. So, all of a sudden, you go from having a meaning and a purpose and a something to do every day to all of a sudden you're kind of in the way if you show up to work, even if you come by just to say hello. And so, that can be tough. So, one of the things you want to do in any type of exit plan is make sure you have a next step strategy. What are you going to do next with your life? What are you going to do after that exit? What are you going to do when you finally pass the baton? What does that look like for you in that next phase? That'll help make that transition of closing this chapter. If you're opening up a next chapter, that'll help you be way more successful in both cases. It's really important.

And finally, there is some succession risk. You know, maybe your partner isn't ready to lead solo. You know, with a lot of exit planning, part of the that drives value in business is having topnotch management team. Having really topshelf management team. It's really important. And so sometimes people can think, well, I'm going to hand it to a co-owner. don't need to do that management development like I would if I was selling to a third party. And I would say that's probably not true. It may be as important, if not more important, to make sure that you have done the work to make sure that co-owner is really ready to lead the business solo. You know, what systems do you have in place? What processes do you have in place? Uh I've had clients that that want to sell to co-owners and they've never seen P&L statements, you know, so [laughter] believe it or not. And so it happens that way. And so you want to make sure that you've done the work again in advance to make sure that that that co-owner is ready to lead the business, that they've got a vision for the business, they understand the soft management skills that are so important. They understand the financials and how to operate the the the company financially. So building a good management team around that co-owner is really time well and money well invested in that transition. especially if you've got some sort of carry note. If you're going to carry the note, you want to make sure that person has the ability to run that business successfully so that you get fully paid uh at the end of the day. It's really important.

So, let's take a minute and talk about kind of a practical example here. I'm going to tell you a story about a coding company. Now, John and Emily co-own this small software firm and John had built it from scratch for over 25 years. Emily joined later uh you know in the sales and worked her way up and John just valued her contribution to the company and so over time he gifted her uh shares of the business. So at the end of the day she was about a 20% owner John owning 80% of the business. Now over time their goals shifted. Uh John wanted to focus more on philanthropy. He wanted to focus more on family and on his travel. And Emily well she was excited and she wanted to scale the business and really uh grow the business aggressively. So as their goals begin to shift, John begins to recognize, hey, I think it's time for me to step aside and let Emily uh take the business to the next level with the next generation. So he decided to sell. And that was not the toughest part. The toughest part was, yeah, you got it right. It was the valuation. How much is the business worth? Uh John saw decades of sweat equity where he had again built the business from nothing and sacrificed family time and hours and and you know put himself at financial risk over over years to finally make this business work. And Emily came in and all she saw were markets and numbers and opportunity. And so this this difference really was tough for them. So what did they do? Well, after some back and forth they finally agreed on a multi-year kind of buyout plan. So John transitioned out gradually while Emily stepped in and stepped up as the new leader. And so this plan was really well thought out over time. It's about a five-year plan for them. And so because of taking the time to sit down and identify what roles and responsibilities everybody started with and how those were going to transition and how financially the business would transition over time, it really made it for a for a big success. So at the end of the day uh John got the liquidity that he wanted and he got the freedom and Emily got the ownership and she got the opportunity. Now both preserved the one thing that mattered really the most to them and that was the heart of the business. They both really loved the business. They loved what they were doing. They loved their employees. They loved their their clients and even their vendors and and they had a great role in the community community. So that was a glue that held them together. but they wanted to make sure they preserve this high quality business that John had really spent years years uh developing and so they they made it work. So here's the goal. The the key is we don't want to win the negotiation always. We want to preserve what we've built and that was the case for John and Emily.

Well, today we've been talking about transitioning your business to co-owner. So I want to take one last moment here and share with you a personal financial planning tip. And this is so important. uh that that because for most of us our bis as business owners our businesses are our largest asset. When we look at our balance sheet the value of that business can often be anywhere between 75 80 85 90% of our net worth. So it becomes important as business owners that we take time to diversify our net worth and investments. We don't want to neglect that important personal financial planning just because we're building a business that we think one day is going to sell and make us a lot of money. So think of your financial plan life kind of like a table, right? You've got one leg, that's your business and happens to be for most of us the biggest leg that we have. But it's not stable if that's all you've got. So what we want to do in your personal financial life, we want to add some additional legs to that table. The more legs we build, the more stability we have in your personal finances. So think of those as like retirement accounts. Maybe you put a 401k in your business or you do a simple IRA or you put some sort other type of retirement plan in. uh investments. You might have investments outside of your business. Uh where you leverage the cash flow that you're getting from that business to invest in in investments that are outside the business, your savings, uh several legs, and the more you have, the better off you are.

So, you do want to take time to diversify that and make sure that your financial life is really, really stable uh as you go along. Now, as you diversify your wealth, here's some things you can do. contribute to an IRA, contribute to your 401k, or maybe if you have a SEP plan, uh you want to build a cushion outside your business. Make sure you carry plenty of personal financial reserves as well as reserves in your business to weather any types of storms that happen. And again, look for opportunities to develop your your wealth. That cash flow from that business can be a incredible wealth-b buildinging tool in addition to the business. Good strong cash flow builds value in business and it gives you tools and resources to build wealth outside the business as well.

All right. Well, thank you so much for tuning in today. I mean, I'm really glad that you were here and I hope you learned a couple of things today. We've talked about transferring your businesses to co-owners. What are the advantages? What are the disadvantages? We've covered a really important personal financial planning tip and that is, of course, to diversify your vest investments. Use your business to create wealth outside of your business itself. So, here's a couple things you can do today for the Leave My Business Wealth podcast. You can subscribe to the podcast. Uh, take a moment, please leave a rating or review. We appreciate any feedback, even honest feedback. Uh, if you didn't like it, that's all right. Go ahead and share it. Share something that you think is important that we can learn from and then share it with another business owner who may get value from taking a moment to listen to it. Again, I'm Dererick Moffett, certified financial planner, certified exit planner, and uh, we help people leave their business by design.

The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance references are historical and do not guarantee future results. All indices are unmanaged and cannot be invested in directly. Consult your legal, tax, or financial adviser before making any decisions. Investment advisory services are offered through Moffet Financial Strategies, a registered investment adviser in the state of Texas. Business consulting and exit planning are offered through 7-Eleven Consulting LLC. Moffet Financial Strategies and 7-Eleven Consulting LLC are not related entities.