Solocast with Laurie Barkman, show host and business transition sherpa. Laurie discusses a critical owner succession pitfall to avoid. You don’t know what you will do after you leave the business. Personal readiness is an important aspect of business transition planning, and it’s often overlooked. Being emotionally unprepared for the transition can lead to feelings of loss and a lack of purpose. Many owners struggle with the decision within 12 months of selling their business. What can you do now to avoid succession regrets?
Listen in to learn more about:
- Why owners feel pushed out of their business when they leave
- Key drivers for exiting without regrets
- Know what’s important to you for personal transition
- Seller notes, earnouts, and recapitalization strategies
- Take a personal readiness to exit assessment
Show Links:
- Complete Personal Readiness Assessment at MyTransitionScore.com
- Order “The Business Transition Handbook” on Amazon https://amzn.to/3Hqj2eo
- Subscribe to Succession Stories YouTube Channel
- Connect with Laurie Barkman on LinkedIn: https://www.linkedin.com/in/lauriebarkman/
- Subscribe to The Business Transition Newsletter– text Transition to +1-646-495-9867
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About Succession Stories Podcast
Succession Stories is an award-winning podcast guiding entrepreneurs from transition to transaction. Hosted by Laurie Barkman, author of “The Business Transition Handbook: How to Avoid Transition Pitfalls and Create Valuable Exit Options.”
Learn more about Laurie’s strategic business transition planning and M&A advisory services by visiting: https://thebusinesstransitionsherpa.com
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SHOW SPONSOR: STONY HILL ADVISORS
Stony Hill Advisors works with owners like you to get ready and maximize value when you’re ready to sell.
Visit www.stonyhilladvisors.com/podcast for a complimentary business valuation.
Transcript
In this solocast, I’m going to cover a critical owner succession pitfall to avoid that I wrote about in my new book, The Business Transition Handbook. You don’t know what you will do after you leave the business.
This is a common question business owners have when thinking about their future.
In my conversations with hundreds of business owners, I can tell it is the most overlooked aspect of planning. It’s too easy to put off thinking about what your goals are, and how you might achieve them. Maybe it makes you feel selfish or uncomfortable.
According to the Exit Planning Institute (EPI), less than 10 percent of business owners have a formal, written “life after business” plan. Half of owners have no plans in place to cover illness, death, or forced exit.
Even the most affluent and successful founders struggle with one common problem: the regret of how they handled leaving their company. EPI found that many business owners struggle with the exit of their business for a variety of reasons, and that 75 percent of those who exit “profoundly regret” the decision within twelve months of exiting.
As an entrepreneur, you’ve spent endless hours identifying opportunities to solve problems. You’ve dedicated your life to building and running a profitable enterprise with an eye toward future exit. And eventually when you leave the business, you may have expectations of a life of leisure and luxury—only to find you regret the decision.
Most owners feel that they get pushed out of their business when they leave. The happiest exits occur when an owner feels that they are pulled to their “next.” Pull factors give you reasons to be excited about your next chapter. Pull factors are things you want to do in the future.
Push factors are actual (or perceived) mechanisms that make you feel as if you are being “pushed” out of your business. If you sell the company, the new owner or majority investor may not want you to stay on as CEO. You might leave the company entirely or become the Chair of the Board—a role that is less operational day-to-day, and more strategic.
How would you handle this change? Would you feel that you were being pushed out, or be excited to move on?
What would you do if you sold your company or spent less time running it day-to-day?
Many business owners and entrepreneurs face the challenge of wondering what they will do after they leave the business. In the US, it is common for owners to consider selling when they are between sixty-two and sixty-seven based on eligibility for retirement benefits.
Turning off what is likely a big part of your identity is not an easy task. Often our personal identity is intertwined with our business identity. When you leave, and eventually you will, you may face this critical challenge.
Jerry Cahn believes in leading a fulfilling life throughout different life stages. As chair of Vistage CEO Peer Advisory Boards in New York, Jerry works with owners to find more success in their business and personal lives. He founded AgeBrilliantly.org to help people focus on opportunities for a fulfilling life while working in their company and afterward. Jerry and I talked about how to create a positive mindset by thinking about life stages, rather than age stages. [For more, check out my interview with Jerry in Episode 90]
I’ve spoken with various entrepreneurs on Succession Stories about this sensitive issue, and the emotional aspects can feel devastating if you’re not ready for the transition.
In episode 94, I spoke with entrepreneur Sarah Dusek, Co-Founder of Under Canvas glamping business in the US. She was very candid about what it was like to sell the company to a private equity firm. And how she found herself on the other side of the desk. She transitioned from CEO to chairperson, and she stayed on for a year to transition, but it was very emotionally difficult for her.
Your ability to manage your freedom from a time and emotional standpoint is really critical.
When you leave your business, you might feel a loss of identity and a loss of community because your business provided that to you. Having a plan before the sale can help you improve the chances of a successful transition.
One more statistic, and you might be able to relate to this, the National Federation of Independent Businesses found that 71% of their members take fewer than 10 days of vacation per year, despite having the ability to set their own schedules. Are you taking the breaks that you need? And can your business survive without you? If you are away for 24 hours, 48 hours, a week, what would that take for you to truly unplug?
Here is something that I want you to think about. I want you to think about what you might do to build up non-business related freedom, purpose, and relationships. Here’s some examples.
- Maybe taking some time to rest, contemplate.
- Would you reinvigorate some relationships with friends and family?
- What values are more important to you and do they match with your activities?
- Maybe they’re community based, or based in the communities you care about with your church, religious institution?
- Charitable endeavors
- Exercise, travel, the list can go on and on
Really, it’s up to you. In the period that’s leading up to a sale or business transition, it’s recommended that business owners dedicate one day a week to experimenting with new hobbies, spending time with family, and connecting with old friends.
I had a client whose name is Don, it’s not his real name. When I first started working with him, I asked him a lot of questions about how he envisioned his future when he was no longer in the business. He had a son who was working in the business and his name was on the door. He thought about what he would do, but he really didn’t have a future vision. It was difficult for him to think about leaving, it was a stressful environment. The business really needed him. It was not able to thrive without him. He was thinking about cashing out. But it was difficult.
We used a personal readiness assessment, a series of questions that he answered to baseline his readiness score across four different drivers. It’s a great questionnaire and I invite you to take it as well. What we get back is your score across four different key drivers that are in particular that I’ll focus on two here today.
One is future vision and the other is personal detachment. The first one, future vision, what do you plan to do after you leave your business?
These questions really are around understanding why you want to exit And is it because of your health? Is it because of negative things, negative relationships, like a breakup with a spouse or a breakup with a partner? Or are they more positive things, the things that you’re excited about, and you’ve built the business, it’s scaled, you’re ready to maximize the value of it and maybe build another business. Or you are excited for more personal relationships, things with your family, guests who have come on Succession Stories, more than 100 people. And what have they told me?
- They’ve been excited to step back from the day to day
- Take some chips off the table by recapitalizing and bringing in an investor
- Launch or acquire a new company
- Mentor the next generation of family
- Many people just want to retire from the business and step way
- Stay on as a consultant or an advisor
- Serve as a board member staying involved and having an impact on the business
There’s certainly no shortage of ideas of what you could be looking forward to.
The second category that’s really important for having an exit with no regrets is minimizing your personal attachments to the business. What that means is building a fulfilling life outside of your company. How personally attached are you? What have you done to build a fulfilling life outside of your business? How much of your identity and your self worth is tied up in your role as the owner.
It’s very natural to feel proud of the business that you’ve built. But being too personally invested in your company can lead to a difficult time letting go and transitioning out. So how can you start building up before that time, so that it doesn’t feel like a cold water bath over your head?
My client, Don, initially, when he took the personal readiness to exit (PREScore) assessment, he scored a zero out of 100. Yes, a zero. That didn’t feel great for him, our conversation was not an easy one. He kept a positive attitude, he was motivated to make changes. I encouraged him and I’ll encourage you to work through these exercises. Really think about how you can shape your future vision and your personal detachment from the business.
If you go to my website, I should mention this specific page just to make it easy.
https://TheBusinessTransitionHandbook.com It’s the book page. If you put in your email and sign up for the mailing list, you’re going to get a PDF of all the exercises that are in the book.
These are the exercises in chapter four which you may find valuable. I’m going to just mention them here. Again, I encourage if you have the book, dive into chapter four and do these exercises. If you don’t have the book, you can get the PDF for free. Please take a look at the chapter four exercises. There’s a number of things that I’m encouraging you to do.
One of them is to look at a list of factors that are pushing you to exit your business. These are your personal readiness to exit factors. Taking a look at those and seeing where you are.
- Are you burning out?
- Are there family crises?
- Are you bored?
- Do you face a lot of stress?
- Is managing your business just taking too much time?
- It’s just time to retire
- Market has peaked for your business and you feel like your business is on the other side.
- Diversify and take some chips off the table to minimize risk.
- Want to just cash out
And perhaps you have other reasons too and that’s okay.
Another exercise I want you to do is to write down what you’re excited about. What are you excited about after you transition from your business? Now, if your list is really short, that’s okay. You’ve got to start somewhere. What are those things that are pulling you to transition?
I mentioned some of these earlier. They might be getting involved in philanthropy, starting or acquiring a business, focusing on your health getting in better shape, spending more time with family, spending time on a hobby, writing a book, traveling and serving on a corporate board, not your own company but a different board, getting involved in education, spending time with professional communities, being a consultant in your industry, being an expert speaker and diversifying your income streams, maybe you have passive real estate investments you want to get involved with, or day trading, etc.
So that wasn’t too hard was it? Hopefully you’re thinking about this, even if you’re driving in your car, you’re gonna start thinking about these questions. Now there’s a couple of other exercises around personal detachment. Again, I encourage you to grab the copy of the book, go to chapter four, read chapters one through three before that, and dive into some of these questions.
They are going to be getting you to think about:
- Who your relationships are outside of the business
- How you define yourself
- How many hours a week you’re working
- …and how to interpret your scores
If your scores are making it harder for you to detach, that’s going to lead to some ideas for an action plan, what you might think about, and how you might influence change.
Where do we go from here?
Well, there’s a couple of things that I want to point out.
If you see these technical terms, that you consider what they mean for you and your potential role in the business after you leave.
Let me put my mergers and acquisitions hat on and add some thoughts here. From an M&A advisory perspective, when I start working with a client on a sell side engagement, we talk through these lists of questions, so that we align expectations on a path forward.
We talk about what your role should be, what you’d like it to be, after the sale of the business.
On this list are some questions related to owner transition expectations. For example, I ask what role do you want to have with the business after you exit? Of course, there’s no right answer to this question. It’s about your preferences and your vision for achieving a successful exit.
Many times when owners sell to a third party, they’re usually asked to continue to play a role in the transition to the new owner. The more flexible you are with these options is a good thing.
I want to go over a couple of transition roles, things you might consider as you contemplate this transition to a new owner. For example:
- You might want to exit your company completely on the day you sell, you would like to be out
- Continue to run your company and keep some of your equity in the business for a few years, and enjoy a potentially larger exit down the road (recapitalization)
- Be a consultant to the new owner and get paid a fixed hourly or daily rate for your time.
- Continue to run your business for several years after you sell; you might receive an additional payment if you achieve a set of future goals that are agreed upon with the acquirer
- Accept part of your sale proceeds over time in the form of a loan to the buyer (seller note)
- Contemplate a non-compete recognizing this might be a closing condition for the acquirer. Just a little footnote that some states are taking a hard look at non-compete agreements. You’ll want to understand that as well
- Serve on the board of directors or board of advisors for the company
The more that you have worked on your business and personal readiness for exit, the less reliant the business will be on you. Which should lead to the ability for your valuation to be higher and get good offers. Your offers might be lower if the opposite is true. The encouragement is for you to be thinking about what you want to do after you leave the company for your company to thrive without you.
If your offer includes an employment agreement for a short period of time or or a consulting agreement, that might be something you might be interested in doing. Knowing what’s important to you for personal transition is really key and being able to express that in the sale process upfront. It also helps the buyer understand what you’re looking for.
Many times I’ve seen that buyers want to make the sellers happy when it comes to transition and again they’re looking for flexibility. Be sure to articulate your non-negotiables. Also articulate where you are flexible. Owners who are looking to leave the business entirely might prefer 100% cash at close, and not want to entertain a consulting agreement, or a seller note, which is the financing. I’ll explain that more deeply in a moment. Other owners might feel like they don’t want to move on from the business, they really want to stay, and they’re interested in full time employment, and, and open to talking about those things.
Okay now I’m going to switch into some technical terms related to the points that I mentioned.
We’ll put our terminology hat on so if you hear these terms, they’re familiar to you.
One of them is a seller note. A seller note is a type of debt financing that can serve as an alternative form of business capital. A seller could agree to accept a portion of the purchase price in a series of deferred payments. Just like any other any other loan, you would agree on terms like the length of the note and the repayment terms. Particularly with small business transactions where there might be a situation if the buyer doesn’t have enough cash to pay the entire purchase price, they might be getting a SBA loan from the government. The seller might agree to port a portion of the purchase price in a series of different payments.
It also could be a situation if there is a gap in the purchase price between seller and buyer. We might use the seller note as a mechanism to help the buyer out in this economic environment when the interest rates are higher. A seller note could be used as a mechanism to help get a deal done.
The other term I want to mention is an earn out. An earn out is a contractual provision that is written into purchase agreements saying that the seller will receive additional payments if the business achieves certain targets or financial goals. Typically, these goals are set on revenue or profits or something in between where the seller has an impact on those metrics.
If I’m providing guidance here for you, or to a client, you want to get as high up in that list as possible on the financials. Ideally, it’s on something you can have an influence on and control, such as revenue, less so on profits, because you wouldn’t be likely running the company at that point. In terms of an earnout, it eliminates some uncertainty for the buyer, which is why they like it because they’re paying a portion of the sale price upfront. And the remainder based on future performance. The seller receives the benefit of future growth. And this difference can help close the gap if there is a disparity on what buyer and seller believe that the value of the business is today. One way to work through some of those differences is to structure an urn out.
On my show, you’ll hear different guests with differing opinions about earnouts. There are certainly examples on both sides of the coin. You will hear people saying they definitely do not want an earn out because they don’t want to have anything holding over their head. They want to have 100% cash at close. You’ll have others seeing the opportunity having an ability to make an impact and they don’t see it as a negative.
The other term that I use is a recapitalisation. What is that? An equity recapitalisation means you’re taking on another investor which enables you to take some chips off the table. A private investor, like a private equity group or an individual, is going to take an ownership stake in your business. You may retain a majority stake, anything over 50, or you might be okay taking on a minority stake. Through this structure, you’re creating a strategic partnership with the investors. It can lead to a full acquisition down the road. It gives the buyer and seller a chance to work together and see if this is a fit.
There are strategic reasons and benefits. It can give you some flexibility in terms of your timing, if you’re not quite ready to leave yet but want to diversify your interests. It gives you continuity with the investors, and positions you to stay involved with a company and maintain the culture that you’ve worked so hard to build.
Ok, let’s wrap up…
Here are the things I want you to take away from this solocast:
- Personal readiness is an important aspect of business transition planning, and it’s often overlooked
- It’s common for business owners to regret selling the business
- Being emotionally unprepared for the transition can lead to feelings of loss and a lack of purpose
How can you make this content actionable?
- Prioritize activities outside of work, such as your hobbies, relationships, and charitable endeavors that you care about
- Think about what you would like your involvement to be after the sale or whether you’re looking to step away completely
- Understand your preferences for terms such as an earnout, consulting agreement, seller notes, recapitalisation, or an employment agreement
- Dedicate time to these activities in the lead up to a sale, or your transition
If you’re interested in the personal readiness assessment that I mentioned earlier, go to mytransitionscore.com.
For even more resources, dive into my book, The Business Transition Handbook. This chapter that I’m talking about is chapter four. You can get your copy on Amazon and I’d be honored if you wrote a product review. Be sure to visit TheBusinessTransitionHandbook.com to sign up for our newsletter, and get the digital copy of all the exercises in this book. Thank you for following Succession Stories. Get all the newest episodes in your inbox and enjoy!
Thanks so much. Cheers to your future succession.
