[Music]

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

[Music]

Derek: well okay 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 welcome to the leave my business well p podast the financial planning show for business owners who want to leave their business by Design and flourish throughout retirement and life my name is dererk moff I'm a certified exit planner certified financial planner and business owner and I'm here with my co-owner and partner Jennifer my wife of 28 years hey business Builders you guys are amazing your Risk Takers and your job creators you're the people who are out there getting things done every day in our community and we couldn't do this life without you we're so glad that you've joined us today Derek what do you have for us today well today we're going to talk about selling your business to a third party this is what most people think about when they think about exiting their business right the dream is somebody's going to come along they're going to see what an awesome job you've done as a business owner they're going to offer you way more than they should for your business and you're going to make all this money and you're going to be able to s up right off into the sunset with your family and enjoy life and everything goes right well sometimes that's how it goes right that's how it goes right yeah sometimes it does a lot of times it doesn't so we're going to talk about third party sales what it really is and how they work then Derek will come around at the end and give you a personal financial planning tip just like he does every week all right well let's talk about third party sales you know first of all let's define what a third party is a third party can be lots of different groups it could be private Equity maybe you have a private private Equity Group that's interested in your business they buy part of your business now the rest of it later it could be a strategic buyer maybe it's a larger company in your industry and they see the opportunity to come in buy your company and business and increase their market share or maybe add products and services that you offer that they don't so they're able to expand their offering it could be just another person who wants to own and operate your business so I would call this the owner operator acquisition right they're looking to buy the business and operate it just like you do so lots of different things when we think about when selling to a third party can mean are there any advantages to doing this versus the other ways that we've talked about so far well selling to a third party often maximizes the purchase price that an owner or business Builder will get for their business uh if they're selling to a big private Equity Firm the multiples can often be higher if they're selling to a strategic higher those multiples can be higher and so it's a great way to get a lot of money and it typically maximizes the amount of cash that an owner will receive at closing uh and so the other methods that we've talked about you know in previous episodes transferring to family transferring to selling to key employees you know those are great exit strategies but often involve some sort of payout over time where a third party sale you usually get the most cash at closing and a lot of people really really like that idea could this be selling to a competitor it could be absolutely you know you could sell your business to a competitor that you mutually like you know in our business I would say we have a lot of friendly competitors right we're all offering you know retirement planning and financial planning services to to affluent and Wealthy uh business owners and and people but we respect what they do and so we happily might sell your business to someone that you have a lot of mutual respect for it's a friendly uh a friendly competition you know one of the other things that sometimes times this strategy allows an owner to do is control the timing of their exit uh more so than when you're selling to key employees or family you really you make the sell and then you can exit you don't have to stay around as long in that and it can also really facilitate future company growth without additional investment risk from you the owner again the idea here the new buyer comes in maybe they inject Capital maybe they have additional resources that they're able to bring in and and really take that business to the next next level and that's often what owners really want for their companies so is this often your business becoming part of a much larger company kind of being gobbled up into their big company it can be you know it definitely can be you know you think of one of the interesting things in the public market area you think about Burkshire hathway and Warren Buffett you know he buys a lot of businesses and and his philosophy when he buys a business is he's buying businesses with great management teams in place and he's not looking to convert them to the birkshire way he's buying great businesses that he thinks their additional birkshire Capital can really help with and take it to the next level so those owners typically retain a lot of autonomy in how they operate their businesses other times you do get sold up into a bigger conglomerate and now you have to adopt their way of doing business and that's completely different and so it I think it can be sometimes a loss maybe that's a challenge that they face is it can be be a loss of identity or it could be a real gain and that's something you have to evaluate in terms of who the buyer is well there probably are multiple challenges with doing it this way yeah loss of identity is one loss of company culture and Mission you know maybe your way of doing things is different than the new company's way of doing things and that creates a lot of change there um you know you can get a significant purchase price that might be subject to some post closing performance metrics you know maybe there's clawbacks maybe there's earn outs where the company the acquiring company's going to pay you over time based on the performance of the company they want to make sure what you're selling is exactly what they think they're buying and so they have these Provisions in the contract that you get paid later and and sometimes it can be detrimental to employees uh I had a gentleman that I was interviewing uh one time about his experience he sold his business twice to private equity and he told me a story where the private Equity Firm called him and said hey you know uh or not the private Equity Firm I'm sorry the employee called him and said the private Equity just let them go you know a 20-year employee and they were let go and so sometimes it can be detrimental to your employees so while the third party sale is advantageous from the maximizing the value that you get is advantageous in getting the cash UPF front it sometimes competes with other goals that an owner or a business Builder might have and you have to really sit down and weigh what's important to you and and what do you value and kind of manage the tension between those competing goals you know we personally saw this happen remember we had a favorite Lebanese Grill if you haven't tried Lebanese food this is a plug for Lebanese food you really should try but we had a favorite Lebanese Grill and we love to go there their food was absolutely delicious and the owner was so friendly all of his staff I even one of his servers even had me put her phone number in my in my phone just in case I needed something from her later you know they were was very friendly and their food was amazing and when the owner got ready to retire he sold it to someone of a completely different ethnicity and they started serving their ethnicity their ethnic food and while their food was probably delicious we'd gone there to eat Lebanese food right right and so we were really surprised when we it had the same name and the same sign on the outside but the entire internal culture had changed and all of the employees who had been there before were gone and only the new owner was there and she wasn't that friendly and wasn't that outgoing and the food wasn't Lebanese food and we just found ourselves thinking we came to this restaurant but it's not the same restaurant anymore that change had really impacted the culture and the employees in a significant way it it really has and you know I was I was talking to Chris gford who is the owner of threadpool who's helping us do all these podcasts and we were talking about in in business today you want to deliver an experience and not just a product and so that owner in that case bought the product and continued even produce some of the same food but the experience had completely changed and that's really what we were buying into I mean the food was delicious but we were really loving that experience that we had and so when you sell to a third party you lose control and I'm not saying that to discourage anybody from a third party sale again there's lots of reasons that makes sense and often is the one of the best finding cial rewards for the owner I'm just saying you want to make sure you kind of go into these type of deals or any type of Exit Plan with your eyes wide open and that you understand both the advantages and the disadvantages the risk the returns and the rewards that are available in any given strategy it's really important I think certainly some people are perfectly happy to get their paycheck and walk away and whatever happens to the culture or the employers or that's the new owner's problem you know so it just depends on your mindset right what you're really expecting out of the sale right exactly and it's your business I mean you know again you have the right to make choose what you do with your business uh what we think is important is that you go through this exit planning process and identify clearly what your goals are what are your objectives what are you trying to achieve we talk about you know three Universal goals or four Universal goals what does leaving mean when do you want to leave your company uh who do you want to leave your company to and then finally when you leave can you be financially independent that's what we want you to be when you leave that business we want you to be financially independent and so as long as those goals are achieved and then your other goals maybe taking care of employees or protecting employees uh those things can can be achieved as well in any given exit path and those would be the ones that's right for you the one that achieves your goals so let's say you do decide you want to sell to a third party how do you make sure you get the most money you can out of your business yeah well you know it's funny it's not always about the most money uh there are ways that you can you can sometimes it's it's about getting a fair price and having other these goals accepted um I Heard a story of a guy that they did what they call a controlled auction this is a great way to do this where you basically if you're large enough you engage with an investment banker they go to market they identify buyers they start soliciting bids for your company and so in this particular example the owner decided to go with the second highest bid because the highest one there was a mismatch of culture and so he would rather pay get a little bit less but protect that culture than get the highest bid it's a great way to get a great price for your company and so the definitely controlled uh controlled auctions working with other professionals to help you achieve those goals is is really important so we're looking for getting value not not necessarily just the highest price but what matters the most most to you out of the sale of the business exactly right exactly right I think it's a great way of of phrasing that I'm going to steal that by the way in my client meetings that's fantastic yeah yeah that's good so what are some key value drivers then for that third party sale first and foremost management management management and Leadership leadership leadership you've got to have those in place a thirdparty buyer wants to know that when they take you out of that business that that business is going to run seamlessly without you and so having top level top Management in place Top processes and systems that they oversee probably is the number one value driver for businesses the second thing is having a realistic growth strategy you know a lot of business owners just show up and work really really really hard uh and they're successful because they work hard and they've got great people and they're successful but there's not really a growth strategy in place and so so that that buyer wants to know that when I buy this business I'm going to be able to continue to see growth and return on my investment so if you already have a strategy in place and you have a management team that can execute that strategy your business is way way more valuable years and years ago I don't know if you remember this we looked at buying a business you remember it was a janitorial business because I like to clean things right and so I'm thinking this is a great idea for me I'm going to be able to clean and we're going to make all this money and one of the concerns when I looked at the business was that there was four years of declining revenue and I'm thinking man this business and and the valuation of the business was based on four years ago right when sales were great and so that was really a red flag and that was one of the key things that said I think I'm going to pass on this because I'm going to have to pay a premium and come in and turn the business around this is not going to be a good fit for me so those value drivers were obviously not in place it either wasn't being well-managed or there weren't great sales there weren't great systems no no great revenues something was off track that made you not highly value that as a potential business that's right absolutely you know when you're thinking about your management team this I I probably can't stress this enough and in any exit path that you choose having a welldeveloped and trained management team investing in your people is really really critical for you and it's it's good for your people because we talk about taking care of employees these exit strategies if you have invested in getting them training and skills that make them valuable to any business then no matter what happens to them uh what happens to your company they're going to have a place to go because you've developed them in a way that's made them really marketable and so I think as a leader of a company as business owner you have a responsibility to do that so I want to give you a couple things that you can do maybe to help retain key employees uh number one give them strong leadership development plans invest in them make them employer make them uh desirable to have on staff give them everything you've got to really make them attractive employees for the next buyer uh as well and then two sometimes you can put in some incentive plans uh and and those might be like a stay bonus like perhaps you set aside a portion of the proceeds that you get from the