I spend lots of time talking to owners of private companies like you who aren’t sure how they’re going to leave their business. You might think that you want to sell your company to an outsider….someone who can pay you lots of cash. You also might find that after a conversation with someone like me you realize your business isn’t going to get you the cash you thought.
Your question then just might be “what now?” If this sounds like you, read on.
Selling for little cash is a bad idea.
In the wealth management business many deals have the selling owner getting 35 to 40% in cash and then the selling owner holds paper for the rest of the money. Too often owners find that being a bank is just no fun. How would you like to have 60% of your business sale depend on how well your buyer runs your old business? This is exactly what happens in lots of wealth management businesses.
Too often buyers will find things aren’t what they thought. Their cash flow isn’t as good as they thought. Customers or clients leave the business. Then what happens? They stop paying you. Now, the money you counted on for your sale stops coming in. What do you do now?
To me, there is just too much risk in doing this sort of transaction. What do you think?
What can you do to make it safer?
If you’re going to play bank, you might as well play bank with people you know well. Those people could be managers in your company. You’ll probably get a little less down but at the same time your clients will already know these people. It’ll be much easier to transfer client and vendor loyalty. Client loyalty is probably the biggest key in making a business transfer successful.
You can also structure a sale more easily to your mangers that’s tax friendly. You can probably put together a deal with your mangers where 50% or more of the transaction is done with pre-tax dollars. If you’re able to do this you’ve made your deal safer by having it be more likely your buyers will be able to afford to pay you.
How do you know you’ve got the right buyer in your manager?
This is a giant question. The only way I know is to start early and test your manager or management team. You have to go away….and you have to not call in at all!
First, you’re going to want to start by leaving for just a couple of weeks. As the years go on, and yes I do mean years you’re going to want to build up how much time you’re gone. Hopefully before you do the deal you’ll be spending six weeks away or more away, not calling in and when you return it’s like you never left. You can then have some idea of how your managers are going to do after you leave.
Your managers don’t have any money.
Your managers aren’t going to have enough money to write you a great big check. You’re going to have to play bank for a significant portion of the sale. If you’re going to play bank, act like a bank. Make sure you get proper security agreements to protect your loan. That means your managers are going to have to give you a personal guarantee, allow you to control the board of directors and put their home up as collateral.
When you sell your business, you’re the one who’s taking the biggest risk. Make sure you have the risk conversation with your managers early in the process. If you get serious push back from your mangers you have only one choice, move on to find a manager who agrees to these terms.
Start early if you want to consider selling to your managers.
The real trick here is to start early. You can’t sell to your managers if you decide that you want them to take over in the next six months. Both you and your managers need to have years to get used to the idea of an ownership change. You’re going to need lots of time to make sure your managers know how to run your company successfully.
I can tell you that if done properly an internal transaction is often the most satisfying way to sell your business. It just has to be done in a way that makes it likely the deal will work out well for everyone.
If this is something you think is a great idea, I encourage you to have a conversation with us about your situation. It won’t cost you anything except a little bit of your time.