Upcoming STAR-Denver Event
“Making More Money? or Who’s on First?”
May 15, 2015 Lunch Meeting
by Jon Hokama.
Click Here to RSVP.
Business owners may feel that the prospect of selling is like planning their own funeral. So unless you’re akin to Mark Twain’s Tom Sawyer character who witnessed his own “funeral,” you may not be so eager to view it. At some level most owners fear or dread planning so much that they don’t want to go anywhere near reflecting on what they consider their future demise.
Let’s learn from one financial planner who lived to tell about the sale of his business to his employees. Not only did he live, but he’s thriving today. He not only planned his own (business) funeral but his decision spawned a happy beginning for all involved!
This planner sold his firm to employees over 15 years ago. Here are some of the gems of wisdom mined from his presentation at a recent Colorado Financial Planning Association workshop.
How did this planner come to the place of deciding it was time to sell?
Consider what I call the 4 F’s of his decision:
He had a wealth of talent on his staff. He had key employees in place and had something of value to sell to them.
He wasn’t 100% dependent on the sale of his firm to fund his retirement. He had other assets. He could take on some risk in carrying the sale.
He was exhausted from decades of working 7 days a week.
FUD (Fear, Uncertainty, and Doubt):
The internet boom created frothy market conditions and outrageous PE valuations in the late ‘90s. He felt a correction was inevitable (it did come along in 2002) but also knew he didn’t want to have to work hard to retain clients and rebuild his firm in a post-recovery environment.
What were some compelling reasons for him to sell to his employees vs. a third party?
- It’s quicker: there’s no need to look for and vet an outside buyer since there is already high trust between buyer and seller. In this planner’s case the transition took only 6 months or so.
- It’s more natural: Unlike many businesses, financial planning firms depend on building and maintaining a trust relationship with their clients. The clients already had solid relationships with key buyers.
- It rewards loyalty: His key employees helped create the firm’s value and that loyalty could be aptly rewarded.
- It leaves a legacy: This owner insured that the culture and values he had created with these key employees be carried on. He was assured that employees, clients and other stakeholders would inherit this legacy.
What are some of the challenges that had to be overcome to achieve this option?
- Down Payment: In order to purchase the firm, these employees had to figure out a way to get a down payment together. One chose to solve that challenge by bringing in a partner who provided it in exchange for equity in the firm. That led to two immediate challenges for this buyer:
- The dilution of equity and diminishing of control of the firm’s direction.
- A change in culture ensuing from the introduction of a new person with different ideas.
- Risk to seller: If anything in the planning firm changes , future payments to the seller could be in jeopardy. He reiterated that it was important for buyers to have personal liability for the purchase to make sure they had skin in the game.
- Seller’s role change: He experienced the reality of no longer being in charge. No owner can anticipate the challenge of what it’s like to no longer be in charge! This is one of the root fears that keeps many owners in a state of avoidance around exit planning.
- Buyers’ role change: Until someone is an owner, it’s difficult to understand if they can comfortably wear the mantle of ownership. Some “owners” never graduate and remain in an employee mindset.
Whether you are a potential buyer or seller, it’s never too early to start planning ahead.
On a scale of 1-10, with 1 being the lowest, how likely are you to consider selling to your employees?
If your answer is a 10, what’s the first step you need to take TODAY? If your answer is a 1, what other options are you considering?
What’s the first step you need to take to make that option real TODAY?