Our firm has helped about 180 owners step away from their business and into a different chapter of life. Note that I didn't say "Exit" their business. Succession or Selling have traditionally inferred the owner's exit. It doesn't anymore. Therefore, as a business owner, you may have options that will help you get past the hesitation to get started.
Let me comment on the issue of hesitation. Statistically speaking, our firm will meet with 12-15 business owners annually to discuss "what should I do about my business?" They come to us through the following sources (varies year to year):
- Existing clients--30%
Of those 12-15, we will be engaged by about 5-6 to help them develop and execute a plan. Of the remaining, 5-8 will hesitate and do nothing, year after year. About 1-2 per year will pass away or be permanently incapacitated.
The half that act always have a good outcome. Ironically, many of those don’t end up taking the path that they intended when they came to us but are nonetheless very satisfied with the outcome. Why they changed direction is the subject of an entirely different article. The point of this article is to understand why about half of business owners hesitate even though they know they should do something. With 35 years’ experience in succession and exit, I can tell you this much: People who hesitate universally come to regret it. Don’t hesitate. Here are your options and how to get around hesitation.
Keep it and hire someone to run it
- I put this one first because we find it’s the best way to overcome hesitation. It doesn’t change your life as abruptly as selling or transitioning to children immediately.
- In the 90s, we’d pursue this avenue about once every 4-5 years. Owners just couldn’t get their heads around the idea that someone else could run the business as well as they do. By 2010, this option was up to one every 3 years.
- Today, we are doing this 4-6 times every year.
- The beauty is that it solves the biggest cause of hesitation: You don’t have to leave the business altogether; you can choose the level of future engagement that suits you.
- It’s also a perfect “bridge” to a different solution: The new president can help your children get prepared, or help your employees prepare to buy it, or prepare it for a later sale, or run it for as long as you want to own it. Frequently, the president becomes the next owner.
- In every experience we’ve had, the business had increased in sales, profit and market value. At first, this surprised even us. But the reason turned out to be simple: The owner was getting tired and just couldn’t/wouldn’t give the business 150% every-single-day of the year, year after year. Period.
Transfer the business to my children
- In the period from 1930 to 1990, most smaller businesses (under $30,000,000 in sales) transitioned to children or other family members (niece, nephew, younger siblings).
- Today it’s rare; children and other family members have pursued their own dream. Of the family successions that we do today about half result in the family buying the company.
- About half are not really interested in owning. “I’m happy to work here and even to be a shareholder, but I don’t really want to run it.”
- And, we find cases where the family may want to buy the company but are not up to the job.
- If you hesitate in sorting this out, you do your family and your own future a huge disservice.
- All that said, this approach is the biggest source of hesitation because owners don’t know how to work through the process with family. Hesitation ends up being the biggest source of disappointment, family break up, and business decline. My best advice is to use an outside source such as our firm, or a family psychologist, or an attorney with a lot of family law experience. The bottom line: Getting started is hard and working through it is hard.
- But the long-term outcome is always worse. I can’t tell you how many times an owner has said to me, “I wish I had taken your advice and done this 10 years ago. It’s too late and everything you said would go bad, went bad.” That’s the worst part of being in this business.
Sell the business
- There are three forms of hesitations here: First, “What would I do with myself if I sell it?” Second, “If I keep working on it, it will be worth more.” Third, “I won’t get enough to retire on.”
- Any or all of those may be true. But I frequently find that owners haven’t done the homework to find out if any or all of those are true. They just let the issues loom over them.
- The hesitation is unnecessary and almost always has a way of becoming a self-fulfilling (and tragic) prophecy. We have successfully sold businesses – at a good price – that have actually suffered from all of those issues. These take longer because the business and the owner need two or three years to get the value up. And the owner needs that time to define a role for themselves in the business or outside it. But I can’t think of one that didn’t work out.
- Unfortunately, this year three owners who we’ve tried for at least a half-decade to get started on the path ran out of time. One died, one has dementia and the business was liquidated, and one realized that he had reached the age where he didn’t have three years to fix it. It will be a liquidation in a year or so, I suppose.
- I just don’t understand hesitation of this sort. There are so many success stories that we can point an owner to…..business owners whom they know, right in our community who did it….and yet, they still hesitate.
Buy out my partner or vice versa
- This has become less frequent in the last decade, for three reasons: First, there are fewer businesses formed as partnerships. Second, partnership agreements have become better written by attorneys who specialize in these types of agreements. Third, the partners who have a falling out tend to end it quicker, rather than dragging on together for a decade or two.
- However, we still see them. We did two of these in the last 18 months, one in 2019 and one in 2020.
- The most successful and friendly are where one of the owners is at least 10 years younger than the other. It’s a natural process. It does take a lot of self-honesty for the retiring owner to be willing to accept an actual fair market price; they almost always have an unreasonably high price expectation. When the owners get distracted by difficult purchase terms, the business suffers dramatically. That’s why the right attorney or Decision Associates M&A is needed.
- When the owners just don’t get along anymore, it’s a lot tougher. But a solution can almost always be crafted; we did two of those recently. Otherwise, it often results in a sale of the business and everyone gets a fresh start.
- “Start” is the operative word here. Getting started on a partnership exit means having to face up to and talk through and negotiate through issues that are difficult and take place while you are working together every day. While I understand why this causes hesitation, I’ll promise you this: it gets worse with every passing month. Not year, month.
Sell to your employees
- This used to be rare until about 2005. Around that time a number of things changed. First, banks became more flexible in their approach to financing employee purchases. Second, the secondary financing market (primarily economic development agencies) were willing to take a larger position in joint cooperation with the banks. Third, the employee leaders in many companies had become better business people because owners had delegated more responsibility.
- Owners tend to be less hesitant to start down this path because there are fewer reasons to pause than other options. First, they can negotiate a role for themselves. Second, owners almost always hold part of the “paper” (sometimes all of it) and can negotiate re-capture terms and other conditions. Third, employees, while held dear, don’t hold as much emotional attachment that children do.
So, my friends, don’t hesitate. Even if there are issues that will take time to address, you won’t get to the finish like until you cross the start line.
For questions or more information, please email Don at DonMoore@DecisionAssociates.net,