More than one owner has had the idea to hire a manager and let them run the business while the owner retires and continues to take money out. Well, that’s wishful thinking for it rarely works. I don’t say it never works, but I’ve only seen it succeed a couple times in the last twenty-five years compared to seeing many fail. Here are some of the reasons why.
Small businesses are gambles; not investments. Difference between a gamble and an investment is that in an investment, like the stock market, you can only lose the investment. In a gamble, you can lose the investment plus your house, retirement funds and more. So, for the most part, you should run the business and until you are no longer at risk, meaning you sell and get paid.
This is not the same as financing all or part of the business sale for, in those scenarios, you hold collateral to back the transaction. Should the business fail, you collect the collateral. In the “pay out” scenario, only the business is the collateral and you have to run it to get paid.
The basis of the “pay out” scenario seems to me to be based on the end-of-history illusion where we, regardless of our age, understand we and our industry has consistently experienced significant growth and changes until now. But, somehow, we assume everything will stay the same in the future. It won’t.
So what could go wrong as an Absentee Owner?
You can lose through mismanagement, especially if you decide to supervise the business at “arms’ length” (watch over it from Florida, for instance). Now we all think we’re good enough to do this but often it begins to fail financially the farther out we go. In a recent case, we calculated the business would have to pay out for nine years to collect the same as selling it now.
With that much time, there are a bunch of scenarios under mismanagement. What if our manager doesn’t do the sales activities and sales slide? What if expenses go up due to neglect? What if we hose pricing on some significant jobs or accounts? What if people aren’t supervised properly and turn out less work? While there are some answers to some of these operational issues (a good financial based incentive-pay plan is of help), my experience is the “hired hand” isn’t as good at doing these things as you are. Additionally, we tend to get “sand in our toes” and pay less attention to details over time.
But let’s say you overcome these Absentee Owner obstacles.
Where’s the money to reinvest in equipment, facilities and people to meet the changing market? In the case cited above, the owner proposed he split the $150,000 of cash being spun off between himself and the manager. Well, that uses up the cash assuming no sales growth. And if we rely on sales growth; well, usually that doesn’t fare as well under a hired hand as it does under you. Result typically is the business tends to become less competitive over time; costs go up; cash flow goes down; and the business dies a slow death. Owner would be better off having a clean break, taking less in cash now versus potentially taking more over the duration. Least that’s my experience.
What about the changing market? Today, aggressive and successful printers have kept up with changes by investing in wide-format, for instance. What about tomorrow? The manager may want to buy equipment or hire more people but you don’t for it will negatively impact cash.
What if the manager wants to do things differently than you? You know things they don’t and you can say “it won’t work,” but will the manager believe it? This, as well as the topics of equipment and people, begins to pit you against the manager.
Problems with the Manager as an Absentee Owner
Often, when that happens, one of two conditions occurs.
First, the manager “quits but stays.” They see that you won’t do what they want so they assume the attitude that you want it done “your way.” The manager coasts, plays it out and expenses go up and sales go down.
Or second, the manager quits citing specific disagreements with you. Now, do you come back out of your absentee owner life and take over? The longer the time, the less likely you will have the desire to do this.
Let’s say the manager decides to take off a couple days each week. After all, that’s the way you ran the business. Should you wish to correct or discipline them, you find that you are a hostage unless you’re willing to run it yourself. Again, once an absentee owner, the less likely you are to do this.
Finally, if the manager feels like they can take customers (after two years the customers are their customers) and open a new business and make more; they’ll risk breaking the non-compete (which has to be reasonable as to distance, time and other restrictions to be enforceable) and go into competition with you.
I’ve seen a bunch of these scenarios even where, believe it or not, the “manager” is a son or daughter. People do things in their own self-interest even if they are related.
So, to hold a business together over a long period to get the same amount as if you cashed out now is a high risk to me.
That’s why I come down on the side of selling the business when you no longer want to operate it, put whatever money in the bank and walk away with clean hands. That way you’ll have a shot at enjoying your retirement instead of worrying about having to come back and take over. Remember, things change.
Is Your Plan to Sell to an outsider or Transition to son/daughter or employee?
We help businesses with three to twenty employees and more sell or transition. In the case of selling, one has to have an organized business to sell. Is yours ready to market? Is the business organized around functions, not people, so it can succeed without you? It’s not something that can be done at the last minute, although it’s never too late to make improvements. It’s best done five years or more out.
In the case of transitioning, does the son/daughter or employee have the knowledge to “run” and “grow” the business?
This is particularly important for often an “internal” transition requires the seller to finance all or part of the sale. So, you need to assure that you will get paid in your golden years and not have to come back and run the business. The way to do that is to assure your successor is trained. Our program has helps prepare successors among other things.
If you’d like more information on how our program could help you, please message me at tom@cprint.com. There’s no cost or obligation.
Happy Trails,
Tom
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