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Derek: welcome to leave my business well podcast are you a business owner who plans to leave your business in the next 10 years or perhaps you're a business owner looking to protect your business in case of emergencies maybe you're a key employee looking to Poise yourself as a future owner join Derek Moffett in the leave my business well team as we tackle the exit strategy challenges facing more than 33 million small businesses in America business Builder you've built something great let us help you leave it

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Derek: well everyone leaves their business you either leave it by disaster you leave it by death or you leave it by Design welcome to the leave my business well podcast the financial planning podcast for business Builders who want to leave their business by design and flourish throughout retirement and life my name is dererk Moffett I'm the fin a certified financial planner and a certified exit planner and a business owner and I'm here with my partner and co-owner Jennifer my wife of 28 years hey business Builders we're so glad you're here today you guys are job creators your Risk Takers and the backbone of our community and we're so happy to have you join us today so Derek what have you got for us today well today we're going to talk about The Keg The Keg The Keg yes selling your business to key employee groups yeah not a party selling your business to key employee groups that's what we're going to talk about today let me tell you a story there was this guy named John and he owned a um a plumbing business and and his plan uh was to to give his business or sell it to his key employee this guy had worked for him for a long long time and so he made a deal he sold it on an installment note sale which means this employee is going to pay him out over time well the employee just didn't have the Acumen to really run the business and so the business be to fail and the employees stopped making payments and eventually he stopped making all payments to other creditors and everything and John had to come back in take over the business so he was no longer retired and no longer selling his business he was the owner again trying to salvage what was left of his 40 years career as a plumber and a business owner

Jennifer: wow that's terrible

Derek: it is terrible and so what we're going to talk about today is selling your business to key employees in a way that gets you out successfully and is successful for your employees as well in addition to that at the end of this podcast stay tuned and Dereck will share a a personal financial planning tip that's right all right let's talk about The Keg key employee groups you know any owner who considers a transfer to key employees uh hopes to achieve several objectives there's lots of reasons why you would want to give your business or sell your business to key employees number one they may want to put their company in the hands of a known entity often these key employees have worked decades with this owner they've helped build the business that the owner feels a sense of obligation to them and responsibility and really cares about them and cares about their family and cares about their business and their customers and so the idea of of selling that to these people that have helped them make this business successful is really really appealing

Jennifer: probably takes away some of that fear of the unknown how would a stranger handle my customers will a stranger know that Mr Jones really likes to be greeted with a that that takes away all that unknown when you've got a key employee there

Derek: yeah that's that's absolutely right and so it's really an appealing way they also may want to protect the culture of the company this is similar as what we talked about in the last episode about All in the Family you know keeping the business in the family this is a way for that employer to or that owner to keep that company culture maybe their Vision their mission uh you know maybe they have a really strong belief in in serving the community and so they feel like if we hand this order to this key employees then that employee is going to continue to keep the culture alive that they've worked so hard to create over the years

Jennifer: you know often it's keeping the company in the community you know I I think really great businesses are great Community citizens and so often they serve a particular community and if you sell to a third party maybe they close down maybe they take jobs out of that community and roll it up to a larger corporate setting or something and so the owner may feel like he has an obligation to the community that's helped him become successful to keep those jobs to keep those employees those people in that community and working well I know we're in the state of Texas and Texas is known for having our pride in our state that's right and just recently in our community two really popular restaurants were sold to an outof State ownership group and there's been such an uproar in the community about would would the values that we have that that we have at that restaurant the things we enjoy at that restaurant are they going to really change if this other big bad State takes ownership

Derek: that's right and and yes we are we are in the great state of Texas and so that's a big deal but often owners feel that same sort of obligation to their Community they want to make sure they protect that um you know sometimes owners aren't ready to completely exit the business you know and so transferring or selling to key employees uh is a way for them to stay involved in the business over time as well and and that's a goal for several of our clients we know people who have grown up in the workshop so to speak and then they became the owner and when they transfer to other employees they're not exactly sure what to do with themselves you know and so being able to still come in a few days a week being able to still kind of look over things now and then is sometimes helpful

Jennifer: it is

Derek: and finally you know business builders and owners often want to Achieve Financial Security you know we talk about that a lot from the exit St planning standpoint that you know we want clients to exit in a way that gets them financially independent and so being able to sell to key employees keeps that business going and it helps the owner achieve their financial Independence goals as well and so those are um those are lots of the reasons why we find people wanting to sell to their key employees

Jennifer: but those ways don't always work there are some perils too right

Derek: yeah one of the big perils is that without planning key employees often don't have the cash at hand to make the purchase of the business and so as a result uh the the owner doesn't think you know I can't sell to my employees because there's just not enough money there

Jennifer: well are there strategies for that are there things that can be done about that

Derek: yeah absolutely there are ways that you can work with a key employee group to to transfer that business over time and still get paid and this is where that focus on on not selling the business but getting the owner financially independent is really really critical because there's lots of ways we can use cash flow to pay that owner the sum that they need to be financially independent while still transferring that in a successful way to to uh the key employees and so often people that don't have cash we can leverage the cash flow and we can we can work with them in a way that gets both parties satisfied the key employee ownership and the owner fully paid

Jennifer: so I would think then if if you've got a key employee there that another aspect that might be a problem is ongoing Financial Risk for the owner right as in the story that we talked about

Derek: right where the where John continued to face Financial Risk and never got paid for his business in fact when he took it over there wasn't much of a business left and so so one of the principles we operate with in the exit planning process is we don't want to give up control until the owners have been fully paid paid so again we've talked about a lot there's a difference between control and ownership so we can begin transferring ownership to that key employee group but leave the owner in control until they get all the money out of the business that they need to be financially independent and so again this requires time and it requires planning and it requires cooperation between the key employee group and the owner but the bottom line is you own the business you built the business you need to be financially independent when you exit and we want to make sure you're not giving up control until you achieve that goal

Jennifer: so the owner may need to stay involved even after the sale to help ensure that they do get paid and that the business stays intact right

Derek: exactly right so sometimes the owners can't completely exit as fast as they want to in these types of strategies um because of of waiting to make sure they get completely paid before they give up control and it does require some ongoing management sometimes this this is where having systems and processes and people that are in place to really drive the results of of the company become really really critical and I would say you know when you're doing your exit plan there's a lot of things you're going to do no matter what pathway you choose that makes sense one of those is building up a great management team regardless of who's going to take over your business whether that's a third party whether that's your family whether that's your key employees you got to have managers and leaders in place that can operate the company without your day-to-day involvement that's that's absolutely critical and that makes your business more valuable the second thing I would say is you have to have real good Financial systems in place and financial controls we've all heard the nightmare stories right of the person who wakes up and finds out that per someone who's been stealing hundreds of thousands of dollars from them over a period of time because they just didn't have good Financial controls in place so having good Financial systems and controls is really essential to make any type of Exit Plan work well

Jennifer: well it seems like you know if we're talking about the owner staying around post closing too that it would be important to have a really defined set of of rules and of Duties because you've now got a previous owner who's still there right and a current owner who's maybe not in full control so who's doing what who's the boss it seems like it would be really important to get that really well defined what that transition of ownership is going to look like

Derek: yeah I think that's really true everybody needs to have clear roles and responsibilities and those change one of the plans we're currently working on has these two young guys that are going to you know potentially buy the business and and the owners and we're we're laying out a couple years worth of of management development plans for them and what's going to happen is the current owners are going or working full-time today but over the next three to five years their daytoday operational involvement begins to decline the last three years of ownership for them will actually be very little operational involvement and then in about year seven or eight they'll get fully bought out and then they'll exit both control they'll exit financially and they'll have their exit from you know terms of operations Al together so it's kind of like this Continuum the management takes more and more responsibility control while the current o owners begin to wind down and then eventually we get the finan the owners completely paid and now we hand over that control

Jennifer: yeah so what if you don't have any key employees who are willing to take that ownership role

Derek: yeah this that's really important to know sometimes employees don't want ownership they don't want the responsibilities you know I had a a business owner tell me one time you know the great thing about going to work in businesses says you can work half days right that's the idea you think that you can work you know uh do whatever you want to the time is yours you have all this freom

Jennifer: that's right you can set your own hours

Derek: and this lady said that's absolutely true you can work any 12-h hour shift you want to and and sometimes employees don't realize that things that you do as an owner there's late nights involved uh there's work that has to be done there's Financial Risk that that they have to assume and a lot of times they just don't want that they're happy to be an employee and one of the things that's challenging for for those of us that are owners and business Builders is understanding that there are certain groups of people that are happy to be employees they like the predictability they like the limited responsibility and accountability and they don't want to own all the risk that goes with that and as a result they don't get to own all the return either but they're okay with that and I have that doesn't make sense to me I've always wanted to own my own business and that's why I do but there are people that that that's what they want to do and that's okay so if you don't have people that want to buy your business you either a have to go bring people in if that's what you want to do or choose another pathway because uh you the one one of the worst things you can do is is sell a business or transfer a business to someone who's not ready capable or wanting really to do the work that's going to be required to be successful

Jennifer: so if you do have key employee group there that does want to buy the business whether it's one employee or a group of employees is there only one way to get that done

Derek: no there's lots of ways you can get that done you know commonly uh you we we what most people do they do a long-term installment note and this is probably my least favorite way of doing it right because it puts so much risk on that on that departing owner you know the owner sells the business he writes a long term I'm going to pay you out over a period of time uh and and so then the business fails like we talked about so I think there's a lot of Financial Risk with that but it is an option uh you could do a leverage buyout which means the employees borrow money to pay the owner out and so that would be uh you know one one type if the company doesn't have much debt if there's lots of good assets there if the key employees have strong financials they can go borrow the money from the bank just write a check and be done and and there's benefits from that now we don't have that Financial that owner at risk whether they're going to get paid or not uh the disad for the key employees is they're carrying all the Financial Risk now right because they have a bank to pay and and banks are sometimes maybe not as forgiving as as previous owners are so they have to be able to make that payment cash flows have to be really really strong which goes back to financial systems and processes in place to have growing steady predictable cash flows to make that type of plan work but a third way is kind of a gradual retirement this is kind of what we were talking about in the other example where where the employees get ownership in pieces and so for example you might set up like let's say a stock bonus plan where the employee has a a goal to meet or the employee group has a goal to meet and they have to maybe increase revenue or increase profitability by x amount of dollars or percent and if they do you're going to give them a stock bonus well now you've given them a stock bonus they have five 10% ownership let's say and then they have cash flow associated with that then you can start to use that cash flow to help them acquire additional uh shares over time and this might be a three to four five year process where they're gradually acquiring shares when they have 40 50% of the business maybe then they're able to go out and finance the remaining buyout over time and there's some strategies you can use in this to make that really affordable for the employee and very tax efficient for the company as well and so I like this idea you're you're giving up ownership you're not giving up controls maybe you recapitalize you're giving non- voting shares so you remain in control of the whole process but the employees are gradually taking ownership gradually taking more responsibility and then when they're ready they can can finish the buyout and buy the the the owner out

Jennifer: that's a lot of good information there's a there's a lot there um a lot of opportunities and a lot of options within that plan um so while we process all that let's take a minute with a break from our sponsors and when we come back Derrick's going to give you a personal financial planning tip

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Derek: welcome back thank you so much for staying with us through the break I want to say thank you to our sponsor threadpool and Chris gford for all of his hard work and generosity in helping us start this podcast and then also the coffee redefined for allowing us to record in their in their beautiful setting you know what people missed during our break was our laughing but also you getting on to me a little bit about all the financial speak that that we did in that last segment point being it's complicated and you do need some time to really plan well to make sure that you're able to to leave your business by Design it's not something you just do overnight so you promised us a personal financial planning topic

Jennifer: person planning topic

Derek: you know today's topic is do your estate plan and make sure that your estate plan is in align with your business objectives you know the first step often in exit planning is doing business continuity planning making sure there's a plan for your business to to run if something were to happen to you and serve your estate well but you also need to make sure that you have a will and you've thought through what you want to do and how you want that your assets to be left and how you want them to be transferred and so I would I would tell you spend the money to hire a really good State planning attorney who can work with you

Jennifer: uh well on that I was just thinking about the same thing that whatever your business is you're an expert at it and you probably wouldn't want everyone else to try to do it themselves and an estate planning attorney would tell you the same thing in fact our estate planning attorney when we did our Wills told us that she once had a client who had well someone who should have been a client she was once trying to unravel a mess for someone who had actually willed his home to two different people within the same will that he did himself online y so do yourself a favor and get yourself a professional who can help you with your estate plan

Derek: yeah absolutely it's an important thing to do now we just want to say thanks business builders for joining us today uh we couldn't do this without you and we're glad you're here and we're glad you were with us today to talk about The Keg the key employee groups that you might be selling to and the and the pitfalls and challenges that can be associated with that

Jennifer: if you liked what you heard today or you got some benefit out of it we would love to have you subscribe to the podcast and give us a thumbs up give us a review tell us what you really think just do it night L and um recommend this podcast to your friends to your family to people who you think might learn something or who might need our help um you can also visit us at leavey buswell domcom and Moffet financial strategies.com and you can visit our Facebook pages at leave my business well and Moffet Financial strategies or leave my business well on Twitter you can also send us even an email or a snail mail just get in touch and we'd look forward to hearing from you and join us next time when we'll be talking about third party sales

Derek: well as always we're grateful that you tuned in let me leave you with this parting disclosure from compliance 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 and historical 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 thank you again we hope to see you next week when we talk about third party sales

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