Derek: I would even say in some degrees it should work better without you. If you can have a business that works better without you present, now you've created something really valuable and somebody's going to pay you top dollar for that business. It's really about deciding what you want. Again, when do you want to leave? Who do you want to leave it to? And then how much after tax money do you need out of that business to to be financially independent?

Everybody leaves your business. You leave it by death. You leave it by disaster. Or you leave it by design. Welcome to the Leave My Business Well podcast. The show for business owners like you where we can talk about how to leave your business by design so that you can flourish in retirement and throughout generations. My name is Derek Moffett. I'm a certified financial planner and certified exit planner. And today's episode, we're going to talk about selling your business to a third party.

Now, third party sales are pretty much everybody's dream, right? You start your business, you build it, you scale it, and then people come banging on your door to buy it and you ride off into the sunset with a lot of money. That's what most entrepreneurs want. In fact, according to BEI in 2022, 49% of business owners really desire to sell their business to a third party. And it's a wonderful way to exit. But like any type of exit strategy, it's fraught with both advantages and disadvantages. So, we're going to take a look at what those advantages and disadvantages are. We're going to give you some things to think about today as you contemplate selling to a third party. And and we'll always wrap up with a personal financial planning tip.

Here's the reality of third party sales. Buyers don't want to buy you. They want to buy a business that runs without you. I'm going to say that again because I think it's really important. Buyers don't want to buy you. They're not looking to buy a job. They're looking to buy a business that runs successfully without you. So, if your business doesn't run without you, if you can't go on a long vacation and have things work like clockwork without you, you're not really ready to sell your business. And a lot of business owners when they go to market find this to be true. They their valuations are not what they think it is. They they're just they don't have the systems, the people in place, the processes. And so, what they discover is they have a job and not a business.

And so the key idea here in selling to a third party is you've got to take the time again 5 to seven years in advance to really prepare that business so that it runs without you and that makes it more valuable to that third party buyer. So that's an important thing. If you if your business depends on you to thrive, it's not ready to sell. So taking the time to get it ready to sell is really critical in these types of transactions. You want to have strong, solid teams. You want to have great systems and you want to have documented growth strategy and and when we work with clients is often they've got good teams. Systems and processes being documented and written down are always typically still in people's heads. And so it's a lot of work to get those written down on paper so that anybody can step in and operate that business. And then third, probably the biggest gap that I often see is they don't have a documented growth plan. They don't have a growth plan strategy.

You know, back in my newspaper days when I was the advertising director of a of a daily newspaper, every year about August, we started a strategic planning conversation. And um just so that you know, back in those days, the newspaper for some of you who don't know what that is, uh they used to throw this thing at your doorstep and you'd be advertising in it and you it's great part of the community. But but in those days, they would look at the ad director and they would say, "Okay, Derek, here's the deal. Our newsprint cost is going up by 8% this year. or our health care costs are going up by, you know, 10% this year. And so we need you to bring in X amount of new dollars. In fact, for every dollar in expense in that business, Derek, the ad director, had to go find $6 of new advertising dollars just to keep up with the inflation in the business. And so that's what we're talking about having. We would start with that planning place and we would have a a decision. How are we going to grow our business? And we would make a growth plan every single year supported by an actual budget for that year. And then throughout the year, we would measure, are we on track or not? How are we doing? Are we launching new products this year? Are we going to hire more salespeople this year to go out and shake the bushes and find more advertising revenue? You know, what are we going to do to make the paper more interesting and readable so we can grow our subscribers? These are all the kind of conversations we had. Uh and and so even in your business, no matter how big it is, a million-doll business to a $25 million business, you need to have a good solid growth plan. You need to be having these conversations with your team and getting your team involved, getting it written down on paper so that when that buyer comes in, they're not buying sales from two years ago. They're not buying sales from last year. They're buying what you're currently doing and what your plan says you're going to do over time. This is really important. A lot of business owners don't have a documented growth plan. It's essential to making that successful uh thirdparty sale.

You could think of it like this. If you're selling the house, right, and you're the only one that knows where the light switches are, and you're the only one knows how to turn the water on and off, and you're the only one that knows where the keys are to all the doors that you've locked in the house, nobody's going to want to buy that house. They want to buy a house that doesn't have you living in it. Same idea with your business. You want to be able to take you completely out of that business and have it work. I would even say in some degrees it should work better without you. If you can have a business that works better without you present, now you've created something really valuable and somebody's going to pay you top dollar for that business.

Another thing to think about in selling a third party in addition to wanting systems and processes, third party buyers, they want your key employees. They want those employees to stay. They want people to keep the machine running. And so one of the key value drivers in thirdparty sales is topshelf management. You know, back to my newspaper days, we used to we had a senior management team and we had the publisher who was like the president of the company, we had the ad director, we had the chief financial officer, we had a marketing director, we had the editor and every Tuesday morning that team met together and we talked about the business and we used to sit around this big table and the publisher would look and he would say, "Okay, how's business?" And then we'd all go around the table and talk about what we were doing and how things were working. And and and that team could run the business without the publisher ever being there if we needed to. And so that's is so important that you have a defined team of people. These are leaders in your company. And they're they should be leaders of other people, leaders of departments, leaders of systems, and you should be training them to make sure that they understand the financials. You know, everybody on that team got to see a P&L statement every single month. We got to performance to our budget every single month. when we weren't doing well, they were all looking at the ad director saying, "Hey, you know, Derek, where's the money?" So, that's part of that accountability process. Having a good solid management team in place is so important and and and that's helps to build that pipeline for you so that your business can really run successfully.

Third party buyers, they really want your key employees to stay. One of the techniques that we'll use often in in uh planning on these third party type sales is to do a stay bonus plan. I love this idea. Stay bonus plan says this becomes an obligation of the seller and you say I'm going to pay you a bonus over time if you stay. So a lot of times we'll do say 25% of salary and it's paid out over a two-year period of time in quarterly installments. And so for those employees to stick around through that transition, you're going to pay and it's really money well invested because that often keeps that successful transfer to the next generation. If a third-party buyer comes in knows that you've got a again an obligation of the seller, you've got a a stay bonus plan in place that you've planned for to keep those key employees there, they're really going to like that. That's going to be an attractive uh uh business for them to buy.

So, let's talk about some of the advantages to these thirdparty sales. You know, number one, typically you can achieve your maximum sales price. Often, you're selling to a strategic buyer or maybe you're even selling to private equity. This is where you're going to get maximum value. uh for for the uh price of the business. Sometimes even you can have what we call competitive auction type bids where you've got multiple companies bidding for your business and driving that price up. So if you're number one goal is to maximize value, third party sale is often the way to do that.

Number two, you typically get to maximize your cash at closing. Now rarely is it 100% of the value, but usually more than if you're selling to key employees or you're selling to insiders. you'll be able to maximize your cash at closing. Third-party transactions provide significant liquidity event for owners. Now, one thing to keep in mind when you're talking about cash is you always want to make sure you understand what your aftert tax value is going to be. You know, when we work with business owners, we start with these three goals. We start with, you know, when do you want to leave? Who do you want to transfer your business to? And then number three, how much after tax money do you need out of that business to be financially independent for the rest of your life? That's an important question because if you don't plan for that after tax amount, while you may get a huge chunk of change from the business, that after tax may not meet your goals, there's big tax consequences in these third party sales. You want to make sure that you understand them. There's also some ways you can mitigate those and strategies you can look at as well. So, while it's maximized cash, make sure you understand you're getting the maximize after tax value on the sale of your business.

Three, you can control your departure date. You can often negotiate to stay for a couple years. You can often negotiate a stay for a few months or you can leave at closing. Depends on again the negotiation, but you usually have a little bit more control about when that departure date is.

And number four, your business can grow without your investment. Let's say you've spent your life building this business and you're excited about it and you know there's this next level potential for your business, but maybe you're really ready at this time of life to not take it there or you can't. You know, sometimes we reach our own limits of our own leadership ability or timing ability or just interest drives other things in our lives. And so, it's time to pass that baton. Usually with a third party sale, you can know that somebody's going to take that business to the next level for you. And they're growing that business without additional financial risk and investment from you. Sometimes in a third party sale, even the owners will stay on. And this is how Warren Buffett likes to buy businesses. He likes to keep the management in place and then infuse capital for that business to grow. And so sometimes you might be selling to to a third party where you stay in leadership, but they provide some resources that help you take it to that next level where you couldn't might not have been able to do that by yourself. Lots of great options when it comes to selling to third parties.

So it's not about exhibiting your business. It's really about deciding what you want. Again, when do you want to leave? Who do you want to leave it to? And then how much after tax money do you need out of that business to to be financially independent?

So, what are some of the disadvantages when it comes to a third-party sale? Well, number one, loss of identity. You know, again, we've talked about this a lot over these podcast sessions that that for business owners, this becomes part of our life. It's who we are. It's a title. It's what we do. And so, that business and that business owner kind of identity merge. And so, all of a sudden, you go from running this enterprise uh to handing it off to somebody else and you're out the door. What are you going to do next? It's really important to have a next plan, a next chapter kind of defined where what are you going to do with your time? What are you going to do with your talents? You know, there's an old Chinese proverb that says a man should spend the first 20 years of his life uh kind of, you know, building his life, his work, his career, the next 20 years of his life. So, from from 40 to uh excuse me, from from 40, yeah, from 20 to 40 building and learning, from 40 to 60, learning the way of life, and from 60 to 80, teaching the way of life. I love that idea. So maybe you're in that 60 to 80 frame and you're ready to exit that business. What can you do? You've got a lot of life and a lot of experience and a lot of lessons. Do you give back? Do you mentor other business owners? Do you mentor young people in your community to help them get a start? What can you do with all that life that you've learned to share and give back? When you're exiting that business to a third party, you might want to make sure, hey, I've got a really good plan for the next chapter and the next dance. I remember talking to a guy who bought a business uh a newspaper business actually when back in my early investment days and he owned a little community paper and come to find out he and I had worked at different times for the same company uh big newspaper company and this guy had retired and he told me he said Derek one can only play so much golf and the bottom line is he sold his business he got out of it he played golf for a couple years and then got bored so what did he do he bought another business happens to all of us sometimes you can only fly fish so much. You can only play so much golf. You can only travel so much. Whatever it is, have a plan. That next chapter well defined. It'll help you be real successful.

Um, two, you can sometimes get a loss of company culture and values. Uh, somebody told me one time, you know, Derek, you have to be prepared when you sell to private equity, get a call from your 20y year employee saying they just lost their job. That happens sometimes. Your culture change. You don't get to control that culture. Maybe the the new business has a different viewpoint. Maybe they roll up, they take jobs out of the local community and they roll it up to a corporate level. These are all things that happen in these big when you're selling to to strategic buyers or you're selling to private equity, you've got to be prepared for that. Doesn't mean it's necessarily wrong. I'm not trying putting a value judgment right or wrong. I think it's important for you to understand what your value is. So, if preserving company culture is really more pre-minent than maximizing price, third party sales is probably not the way to go. But if maximizing price is important to you, well then it's an excellent way to go. So you've got to weigh through and really take the time to understand what is important to you. And third party sales, you're going to probably lose some culture and identity.

Number three, contingent payments. You know, as I said earlier, while you maximize your cash potential at closing, typically not 100% of it. So maybe 10, 15, 20% might be in some sort of earnouts or clawbacks based on company performance or employees retention or some other sort of performance metric there that the buyer wants to make sure happens before they give you the rest of that money. I heard a story of a guy who uh had a a earnout, a $5 million earnout. I forget what the price of the business was. I think it was 25 or 30 million. and 5 million of that was held back for the company contingent upon the owner's son staying in the business for 5 years and after the sale of the business the son come and says dad I really don't want to stay around the business loses some money there so it's important it happens sometimes so sometimes you have various earnouts you want to make sure you understand what those are how they work and that you're comfortable with them

uh and and four is that potential employee impact and I did talk a bit about that. You know, you create some uncertainty um with new buyers that come in. How are your current employees? So, I would say making sure you take the time to train and set expectations and communicate effectively even in a third party sale is really really important for your employees. The more that you can minimize that uncertainty for your leaders and for your employees and your business, the more successful that third party handoff is going to be.

All right, so let's talk about three kind of key facts from our discussions today that you want to remember. Number one, buyers want to buy the business, not the owner. You've got to have a business that works successfully without you present. Two, buyers want to keep your key employees. Make sure they're the lifeblood of their business. Make sure you've got strategies in place that encourage those key employees staying around. And number three, buyers want a documented, proven growth strategy. Make sure you take the time to develop a growth strategy that's going to grow that business and is proven to grow that business. It'll make your business more valuable in the long run.

All right, let's shift take a moment. We'll shift kind of a personal financial planning tip for you today. We're going to talk about understanding social security. Uh you know, even if you're selling your business and you're stepping into that new season of life, making sure that you understand social security is a key component of your retirement uh planning. And so understanding those social security benefits is really really essential. Uh make sure you understand what your claiming options are and you coordinate those claiming options with your your spouse. Lifetime benefits, you know, the timing matters, coordinating with your spouse, the benefits, your taxes, your other income, all that really is important to do. So take the time to sit down, work with a professional to make sure that you understand what your social security options are. A lot of times some people will want to delay those social securityities to age 70 so they get a maximum payout. I like that strategy often with spouses that at least one of them the usually the higher one gets that higher payout because that just takes pressure off that portfolio if we have a little bit higher guaranteed income. Other people, man, they're ready to have that money immediately. The first minute they can get it, they want to have it. And so, what are the trade-offs? What are the things you need to consider? How does this impact your life if you wait, if you take social security? Important things to talk about.

So, personal financial planning tip about age 60, start looking at your various social security options with your financial adviser or planner and make sure you understand what those options are and how they work within your particular financial situation. Uh don't claim social security in a vacuum. Uh look at it as a part of your overall financial picture. Super important. Timing matters here.

Well, thank you again so much for tuning in today. I was excited to visit with you about thirdparty sales. I hope you found a couple things that are really important and helpful. Uh we've talked about selling your business today for a third party. What the advantages were, the challenges, some of the disadvantages, and the mindset shift that's required to make that business transferable and valuable ready for sale. So remember, every business owner exits one day. You can leave your business by death, you leave it by disaster, or you leave it by design. We're here to help you think about how you can leave it by design every time.

If you like the podcast, take a moment to like it or subscribe to the podcast, write us a review, or share it with someone else who you think might find value. Again, thank you so much for tuning in. I'm Derek Moffet, certified financial planner, certified exit planner, and uh I hope you leave your business well.

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.