A business sale dilemma arose in my conference with Michael and Linda last week. I share it as a case of where not to be. Of course, names and circumstances have been changed. Here’s a cryptic version of the conversation.
“When are you planning to sell?” One to two years. Oops, it often takes two to three years to sell, so they’d better get started.
“Where are you in funding your retirement between 0 and 10?” Four, meaning they need cash from the business to cover retirement.
“So, what is the business worth?” Fortunately, I worked with them before and estimated the value in 2006. We then did some pencil whipping and estimated it at $300k today.
“Where would you be if you had $300,000 cash from the business?” Six was the answer with a caveat. If they sell after 2016, the building would be paid and that would put them at an eight, closer, but still no cigar.
This means one of two things. Michael and Linda will have to continue to work ABS (after business sale) or make it worth more between now and then.
“How would you earn money after the sale, Michael?” Neither he nor Linda had a clear idea.
Okay, that still leaves making the business worth more.
“What do you do all day, Michael?” He arrives at eleven and leaves at five. While he supervises the checkbook, the real work is done by his manager, Tony. Huh-oh.
What’s the problem? Michael has retired in place. The business is going well and is providing a nice income without much involvement by Michael.
So, I asked the “nuclear” question.
“What would you do if Tony quit?” That’s a problem. Michael isn’t willing do what would be required. He saw this as a threat as I did, but I also saw it threatening the sale.
A buyer could be a hostage to Tony.
If Tony didn’t go along with selling to an outsider, it would be a problem. Conceivably, he could start his own shop taking customers with him leaving little for Michael and Linda to sell. Even if Tony went along with it, the buyer would discount the price to compensate for the hostage risk. Either way it would lower Michael and Linda’s funds.
“Has Tony shown interest in buying the business?” They spoke briefly five years ago and he was interested but not since. Another warning: don’t bring up a sale unless you’re ready to sell. You may establish an expectation you might not be able to meet.
“Does Tony have any money?” He probably doesn’t, although he probably has good credit and home equity. That’s good news as an internal transition might be possible.
“Could Tony run the business today?” Tony knows everything except finances and some sales training.
But then there’s that “after 2016” timeline. That’s a full two years from now.
Business Sale Solution
Michael and Linda have to keep the business going for at least two more years before they can begin to sell. Until then, the business needs to grow. That’s hard for an owner to face: selling when things are good. Now would be the perfect time to sell except they would be short in cash.
So the best scenario is that Michael becomes fully engaged and helps improve cash. That’s problematic. If he does, they would reap two rewards: increased income to add to their savings; and an increased value when they sell.
But it’s best not to raise the topic with Tony so not to trigger a premature sale.
Michael and Linda need to take a hard look at their retirement funds with their financial planner. In the meantime, they must focus on earning more money and saving it and increasing the value of the business. Or they can run it as is untile they have the money and hope that Tony doesn’t bolt in the meantime.
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At CPrint, we assist owners with internal transitions as well as help get the business ready for sale through improving performance. Should you wish to have a no cost or obligation transition conference with me about your situation, email me at tom@cprint.com. I’ll be glad to chat.
Tom Crouser
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