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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 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 thank you for joining us today my name is Derek M I'm a certified financial planner and certified exit planner and I'm with my lovely wife Jennifer of 28 years and we own a business together mfet Financial strategies and leave my business well

Jennifer: hey business Builders we think you guys are heroes you are Risk Takers and your job creators and you do so much uh important work in our communities and we're just glad you're here with us today well we have got an exciting episode for you today because we're going to talk about all the different ways you can leave your business and last week we talked about what's important we kind of covered the idea of four Universal goals and the other goals that that people have and what the exit planning process is a little bit and today we're going to talk about eight different ways you can leave your business and then at the end dererk will share a personal financial planning tip for us so Dereck why don't you jump in and start us off with the ways that a business Builder can exit their business

Derek: sure you know when you think about exiting your business I think a lot of people will say you know I want to sell my business that's the only pathway they think but there's actually eight different ways you can leave your business the first way is really common and that is to transfer your business to family members you know a lot of the people that we work with have business adult business active children in their business and their goal is to transfer that business to the Next Generation to pass that baton they've worked hard to create this Legacy and they want to make sure that that Legacy lives on and when that works out that is really beautiful

Jennifer: you know we just got to watch some really good friends go through this process where the business owner grew up with his father learning the business from his father and then he launched out on his own and created his own business and now we've just gotten to watch the really successful transition to his adult sons who have been working for him and it's really beautiful to watch that all come together

Derek: yeah it it really is and funny story that one of the sons actually posted on LinkedIn a picture of his kids and says they are now the new owners now they're only about three and four years old but it was hilarious but that gives the idea they're thinking multigeneration in their business so that's a lot of people's goals doesn't always work out and it's often really complicated in fact there's a lot of challenges that deal with transferring your business to your family members we were just talking earlier about some of the landmines that are there when you're working with family and um what if you have multiple Offspring or nephews and nieces you know siblings multiple people who are working with you in the business or who are family members who only work there now and then how do you do what's Equitable for everyone if you've got three siblings all you know or three children who are siblings and they all want a part of the business but only one of them's been in there day and day out how do you handle for that without destroying the relationship or how do you put one sibling as the boss and not destroy the relationship between them or maybe you're running the business and your younger brother wants to take over and he's really not been a steady hand there at the business what do you do how do you make plans for these things those are all things we address when we when we work with clients on the transferring business to family members and it's a really a complicated process and you've got to really think through what you want we talk about an idea called you know we want to be fair but not necessarily equal and so how do we be fair to everybody involved but but that doesn't have to be equal to everybody the exact dollar amounts and things

Jennifer: and another thing that I want to point out is that we are going to actually dive we're giving you a little bit of a preview of our next episodes we're going to dive deep into each one of these topics in upcoming episodes so stay tuned and and uh listen as we go into more detail on each of these

Derek: yeah so we'll give you a broad overview of these eight exit paths and there are probably really more than eight but these are the eight most common ways and so then we'll go deeper on those

Jennifer: yeah absolutely and sometimes the eight can be mixed and matched together we see that too

Derek: so the second way you can leave your business is you might be able to sell your business to one or more key employees and as we talked about in our first episode you know often business Builders like yourself has spent decades building this business and you may have a couple of employees that really made you successful I mean it was their contribution to your business their hard work uh you you know their ability to make things happen that made you as successful as you are and and you want to acknowledge that reward that and so we're working with some clients now this is exactly what their goal is they want to hand this baton to these two employees that they really think have been major contributors to their to their success and and that's important so you can't do that you can sell to key employees

Jennifer: you know I remember when Derek was in a strategic leadership role in a company that he did not own and there was sort of an opening that came up and I asked him about a particular employee who had been there for 20 years at least and if he was a key if he was an opportune candidate for that because he had been there so long and Derek said you know he's good at what he does but he's not a leader he's not a manager he's he needs to stay right where he is he's just because they're good at doing a certain job doesn't mean they would be good at leading others and so I think that's something to consider when you're working with figuring out who your key employees are just because they are great in their role doesn't mean they would be great in a leadership role an ownership role a managing role and so um you know working through a good plan helps you figure out if your key employees would be good owners

Derek: yeah that's I think that's an excellent point and a lot of times we want to test that out ahead of time before we even let the employee know that we're going to talk to them about employer uh ownership or their ability to buy the company because um we want to know do they have the capacity you know sometimes they have the capacity to grow into it and they don't have the skills and that's just the TR training and development issue and sometimes they really just don't have the skills or the capacity we got to identify that now there's a big question when you sell to employees a lot of times clients will say or business Builders say hey my people don't have enough money to buy the business and I just want to let you know that is not an issue there's ways we can make that work and everybody wins and we're going to go into that in detail in the episode on selling to employees

Jennifer: we just did a social media post where we talked about identifying your employees and one of the the number one tip in there was if you think you have a key employee who might be a potential owner ask if they're interested in ownership because sometimes people are not interested in that they really want more time for their Hobbies or they want to be able to pour all their money into their boat whatever you know they don't necessarily want the burden of ownership so if you're considering a key employee that's a really important place to start is ask right right do they even want that

Derek: that's great the third way you can sell your exit your business is you can exit using an employee stock ownership plan we call those esops there's also some employment trust and employee employment uh owned cooperatives as well that you can do but the idea here is you're going to sell your business to a an entity that gives your employees ownership as collectively as a whole so it becomes like an employee owned company in an ESOP this is a great strategy if your business is large enough and you've got enough employees it's a great way to get some chips off the table so a lot of times owners will get financially uh sell to the ESOP they get a paycheck for that they still operate it and control it sometimes even for years and then do a final exit down the road it's a great strategy

Jennifer: so an important part of that plan would be to determine leadership because what you don't want is a 12he headed monster because 12 people have bought the company and there's no leadership and there's no strategy for who's going to manage who's going to lead who's going to provide Direction so part of the plan becomes what does leadership look like if you have an ESOP if you have all these employees who are all owners

Derek: I think that's really good that exit planning is a lot more than just the strategy to get out of the business it's really comprehensive and looking what are all the components that we have to do to make this transition successful and so some times that means we have to have a management development program in fact this is probably in any Exit Plan you want to have that in place because it's the number one value driver top level management you've got to have people that can really manage and lead the company without your involvement and that's critical in this type of sale there's a difference between ownership and control and so in fact any of us that own stock you know and publicly traded companies have ownership in a company but we don't have control and so there's you can make a difference between those two and and reward people with ownership but also make sure that control is in the hands of capable leaders of your company yeah you could sell to a co-owner maybe you have a partner in the business and you want to transition that business to the co-owner they buy you out and this is an important thing to do we see this a lot of times when you have an age discrepancy between owners maybe you have a Founder who has built the business started the business brings a partner on and then later on decides that they're ready to exit and then the partner buys out the business we see this a lot we're working through a couple of plans like that right now and um there is some complexity to that making sure that um it's Equitable for everybody involved and that everybody understands and agrees you don't want two horses pulling different directions and so making sure that everybody's on the same page moving forward is an important part of the plan

Jennifer: yeah and balancing the tension sometimes between you know an owner uh who who who has founded the business giving up control completely is often challenging and so making sure that this partnership that's worked so far continues to work and there's a friendship afterwards so we we try to think through all those potential Dynamics

Derek: well and maybe a clearly defined exit path for the partner who is selling yes yeah yeah clearly for the selling and maybe the one who's buying too what is their exop paath look like you know one of the cases we're doing uh right now the design the the gentleman that founded the business has been in the business a long time brought a partner on there's a pretty good age discrepancy there so he is exiting but he's only selling 40% they're 5050 Partners he's only selling 40% of his interest he's going to retain 10% next partner is going to grow that business sell to a third party so the first partner will get paid twice once at the first exit and then once at the second exit so there's all kind of things you want to factor in consider

Jennifer: when Smart Plan Mr mof yeah yeah yeah

Derek: you could ALS also sell your business to a third party this is something that comes up a lot in fact as I said earlier this is what most people think of you know is I'm G to sell my business to somebody

Jennifer: you hear that all the time people who say well I'm G to design this app and I'm going to grow it up big and then I'm GNA sell it to you know uh the metaverse or you know whoever I'm gonna or I'm gonna design these shoes and they're going to love them so much and Nike's going to buy them out from me right

Derek: yeah exactly right that's every entrepreneur's dream right that you build this big business and you sell it to somebody bigger but a third party can mean a lot of different things a third party could be a strategic buyer you know somebody else in that industry that really you know wants to acquire the work that you've done um we've seen this a lot of times in in the craft beer uh Arena where these companies have begin to get bought up by these larger beverage companies uh happens all the time and so so that's an exit third party it could be private Equity you know private Equity is getting involved in lots of different Industries I talked to a gentleman the other day who uh sold he's a dentist and he sold his business to private Equity uh we have an eye doctor that we know that sold their business to private equity and so private Equity often can come in and and that may be a phase buyout again a phased exit strategy uh you could sell it to a com friendly competitor that's often a good pathway so selling your business to U outside third party is is lots of different Pathways and third party can mean different things and I want to tease you we can talk about a lovely thing called a controlled auction somewhere down the road when we get a third party sales it's a great way to get the most for your business

Jennifer: well and we our eye doctor is still working yeah still still taking care of my eyes while he's already sold to the private Equity Group and so there there are a lot of different ways that that can look like that doesn't look like immediate exit always right

Derek: yeah absolutely you can engage in an initial public offering you know this is the other big dream for entrepreneurs we're going to grow the business so big we're going to take it public you know and cash out with billions you know ring the bell on the stock exchange yeah it's a legitimate way to to exit your business and and now you have a lot of owners who have voices and shareholders and things too uh you can retain this is an interesting concept for a lot of people and they don't really think about this but you can retain ownership because there's a difference between ownership and control and become a passive owner you can just get dividends or you take you know distributions from the corporate you know earnings of the company uh throughout your retirement life and if you set this up well it's going to be a great way you know a lot of times business owners you know need the financial resources that that business you know provides them to be successful in their retirement years and so sometimes hanging on to the business is really a great strategy

Jennifer: just yesterday I saw a business listed for sale it was a dry cleaner yeah and the owner lived in California passive owner and the dry cleaner was in Texas being run by managers and employees in Texas and um it's exactly what you were just talking about this is a passive owner just looking to go ahead and finally sell the business

Derek: yeah in fact one of our clients owns a business like you know owns a business and and the son has taken over the day-to-day operations dad continues to draw you know an income from the business and comes in once or twice a month and you know looks around and then says good job son and leaves it's great so it's a legitimate way to to exit your business and the final one is well you can just liquidate every bit of it

Jennifer: yes you can you can design it and this strategy requires planning right well to work well it does to work well now we've seen liquidation happen because there was no plan that's right and uh we watched a dear friend of her of ours lose a generational family business because there was no plan and and um when the key dver of the business passed away there was no one to run it and no one wanted to buy buy it and all of the assets just had to be liquidated and so that can be an unplanned and unfortunate event or it can be a really highly planned really successful event

Derek: yeah absolutely you know when we talk about exit planning we deal with uh you know some Universal goals and one of those Universal goals is how much after tax dollars do you need out of that business to be able to retire comfortably be financially independent and so in the liquidation strategy we've got to make sure that there's assets there this strategy works well for asset heavy companies companies that have trucks and equipment and property and real estate

Jennifer: can L inventory

Derek: a lot of inventory it can work well if it's a service business like ours well there's really not very much to liquidate you know nobody's going to pay me for my my computer very much paper clips paper clips right because all the the service is the business and so it's got to be the right type of business and it's got to have assets that you can liquidate and and make money from

Jennifer: yeah well we're going to take a minute for a brief message from our sponsors and when we come back Derek will give you a personal financial planning tip

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Jennifer: all right Derek so what kind of personal financial planning tip do you have for us today

Derek: well I think plan well and by that I mean plan you know a lot of us are busy business owners owners and we've got life going on and so uh we don't take the time to to plan very well and often if anybody read old stepen cubby you know books and things he would talk about things that are important but not urgent and planning falls into that category it's often really really important but it's not very urgent so in the first episode we talked about getting organized the second we're going to tip is to actually do the planning work take time to sit down and think through with your spouse what's important what are you wanting to achieve what do you want to protect to make sure you don't lose and then work with a professional to help create a plan that is customized and tailored to you do the planning work you can't really shortcut it it's got to be done

Jennifer: you know I used to have a friend who was a professional Baker and I worked with her and she ate Ling Cuisine every day nothing against Ling Cuisine they're great but it always surprised me that someone who made beautiful fresh food for a living ate frozen meals every day and it's because she was so busy making food for her clients that she didn't take time to make food for herself and I think it's kind of the same you know that business owners are often so busy and and burning the candle at both ends and doing so many things for everybody else and they don't often they they don't often think they have time to stop and make a personal financial plan you know to spend the time to meet with a planner to make an exit plan that takes a lot of time it's labor intensive it's time intensive and so it's important to take time to stop and do it you know because like we've said over and over again everybody's going to leave their business one way or another and so we want to make sure you take time for that but you're also going to need your personal assets your personal income and one way or another life is going to happen so you want to make sure that you plan well for it

Derek: right absolutely I I had heard a story of a gentleman that owned a business it was a construction business and he had a couple of key employees and his wife and so he did an estate plan and he bought some life insurance $2 million worth of life insurance and he was in his early 50s and did not do any other really additional you know Financial Planning and he died unexpectedly and so uh the state ended up being bankrupt and what happened was his company his employees left they didn't think they had jobs and so they defaulted on everything and everybody sued the estate and so the wife walked away with a couple million dollars in life insurance now the sad thing is that's not going to provide near the standard of living that she had been accustomed to and so just some planning just some intentional thought would have avoided that disaster and so do the plan plan well hire a team of great professionals to help

Jennifer: well business Builders can we just say thank you so much thank you for what you do you are important to us and important in our communities and your goods and services that you provide are things that we need and we're so grateful that you do that work we want to say thank you today for joining us as we talked about the eight possible ways that you could leave your business and we want you to stick with us we want you to come back next time we're going to talk about It's All in the Family where we'll dive deep on that first strategy we talked about successful family transfers and if you liked what you heard today subscribe to this podcast even if you didn't like it subscribe to the podcast or at least leave us a review just be nice and uh we recommend our podcast to your friends your family anybody you know who might uh benefit from this who might need some help with their exit planning might need to learn some of these things um you're welcome to join us at leave mysw well.com or at mof Moffet Financial strategies.com you can also join us on Facebook at leave my business well and Moffit Financial strategies and on Twitter at leave my business well feel free to email us um you can even write a letter if you're into the old fashion stuff um just be sure to tune in and join us next time

Derek: absolutely and as we leave let me leave you with this one final disclosure that the opinions voiced in this podcast are for general information only and they're not intended to provide specific advice or recommendations for any individual all performance references 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 advisor before providing any before making any major

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