Looking for advice in selling a business

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yosh99
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Joined: Thu Apr 19, 2012 8:44 pm

Looking for advice in selling a business

Post by yosh99 » Wed Feb 27, 2019 11:47 am

I’ve owned a small business for 17 years and believe it’s time to sell. I’m 68 and have enough retirement savings outside of any of my business considerations to retire comfortably so I don’t need the cash from the business to retire. However, I want to stop worrying about the business. There are two key employees who essentially manage it now and would like to own it. I’ve recently had it professionally valued at $3 million and the two key employees would each like to buy a third for $1 million each. I’d like to keep a third, or some level of ownership just in case one of the many “big deals” we’ve been working on over the years pans out.

As I look at the situation, there are three options:
  • 1. The two are approved for a $2 million SBA loan at 8% for ten years. This option gives them 2/3 of the business and me an immediate $2 million. I would retain 1/3 for myself. Their monthly payment to the bank is roughly what I would have drawn in salary and benefits had I stayed and since I would not need to be replaced they should have ample cash flow to pay the loan.
    2. I could finance this myself with terms similar to the SBA loan. Over ten years I’d get a monthly amount similar to my current salary and an additional $820,000 in interest for a total of about $3 million. I would still retain 1/3 of the company.
    3. I could continue to own the business, pay myself my old salary, but give the two enough control and compensation to mostly satisfy their desire to own the business. Let them split most of the profits, etc. At the end of 10 years I would have earned about $3 million and still own 100% of the business.
Option 2 makes no sense to me. After 10 years I’d get as much money as with Option 3, but lose 2/3 of the business. Option 3 lets me keep all of it.

So I’m looking for insight in how to choose between Options 1 and 3. Do I take $2 million today and keep 1/3 of the company, or $3 million over ten years and keep it all? The first option has the advantage of me cashing in today and not worrying about the business while still being able to profit from future growth. It’s a “set it and forget it” kind of deal. The third option gives me more cash and I retain the business, but I’ll have to pay more attention to the company.

I’m thinking Option 3 makes the most sense, but I’m looking for insight from the Boglehead group. One never knows what one doesn’t know and I look forward to your comments.

Thanks.

bampf
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Re: Looking for advice in selling a business

Post by bampf » Wed Feb 27, 2019 12:26 pm

I am not sure why you would want to retain ownership when you say you want to stop worrying about the business. Put another way, why would I continue to work for you, do all the hard work and not end up with the business? If they manage it and want to own it, saying you can just take more money (the profits) and have more control but you won't own it doesn't satisfy their needs.

Let's try it this way:

What do you want? Money? Run the numbers on $2MM guaranteed today +1/3rd vs $3MM tomorrow + 1/3rd. The 3rd option gives you no payout but, you retain the b.

I think option 1 and 3 are not the same option. One sells, one retains. What do you want to do? If you want to stop worrying about the business, sell it. What happens when you move on? Will it get sold? Will it get sold for more or less? Do you want to have your heirs deal with the it gets sold? Are they able to properly value the business the way you can?

Thegame14
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Re: Looking for advice in selling a business

Post by Thegame14 » Wed Feb 27, 2019 12:33 pm

Id say option 1, you get the $2M immediately and retain 1/3 interest in the business, but what does that mean? Do you get 1/3 profits each year, or do you just retain 1/3 equity and in case the company is ever sold you would get 1/3 of the value of the sale?

researcher
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Re: Looking for advice in selling a business

Post by researcher » Wed Feb 27, 2019 1:06 pm

yosh99 wrote:
Wed Feb 27, 2019 11:47 am
I’m 68.
I believe it’s time to sell.
I want to stop worrying about the business.
I don’t need the cash from the business to retire.

The third option gives me more cash and I retain the business.
I’m thinking Option 3 makes the most sense.
How can Option 3 make the most sense if 1) you want to sell and stop worrying about the business and 2) you don't need "more cash"?

Option 1 seems like a no-brainer to me.

TLB
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Re: Looking for advice in selling a business

Post by TLB » Wed Feb 27, 2019 1:57 pm

I would pick option 1 with no personal guaranties to their loan or the company going forward.

hicabob
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Re: Looking for advice in selling a business

Post by hicabob » Wed Feb 27, 2019 2:05 pm

wrt option 1 … The 2 working could outvote the non-working party, assuming the stock in the company is divided in 1/3rd's. This can affect "distributions" vs salary . I was in a 3 owner company where 2 of us worked - You get some "interesting" discussions.

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djpeteski
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Re: Looking for advice in selling a business

Post by djpeteski » Wed Feb 27, 2019 3:08 pm

The biggest deal in all this is that you are going to be moving from a owner/boss to a peer. This could cause some problems. Also will the two other partners get along with each once they are at an equal ownership level as yourself?

If it was me, I would want #3, which will require your involvement.

Or something you did not list: selling the whole business. If that means the two key guys have 50/50, or one buys you out, or you sell to a third party. 1 and 2 could be a big headache that you are not anticipating.

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prudent
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Re: Looking for advice in selling a business

Post by prudent » Wed Feb 27, 2019 3:23 pm

I don't see how keeping part ownership will enable you to stop worrying about the business. With 1/3 of the ownership, you'll be a minority owner. Maybe the other two have different ideas on how things should be done. They'll make changes you don't like but you'll have no say. You'll feel their decisions are costing you money. You'll want to be consulted on big decisions as a part owner. I think you'll still worry. How can you not be involved when you're still a part owner?

Given your options all involve you being a part owner, I think you'll have to accept that you are going to still worry about the business. If you want a piece of potential future big deals, and are going to remain part of the ownership, realize that the dynamics are going be much different going forward. Even if today everyone gets along like close family.

mgensler
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Re: Looking for advice in selling a business

Post by mgensler » Wed Feb 27, 2019 4:10 pm

My thoughts are 0% ownership or 100%. If you want to reward these employees and gracefully exit over time, maybe look into an ESOP.

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8foot7
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Re: Looking for advice in selling a business

Post by 8foot7 » Wed Feb 27, 2019 4:27 pm

I don't know why you'd retain 1/3rd of the company unless you provide for failsafes such as voting stock so that you still have some clout to vote with. The problem is that the deal looks a lot crappier to the two folks paying you $2 million if they still have to contend with your vote.

I'd try to work a deal with a little more upside on that last third -- something like where you get 45% of any profits, up to $1,150,000 total paid to you, and yearly in exchange you give a proportional amount of your remaining ownership to the two other folks. So your 2019 profit is $350,000, you'd get $157,500 of that, and in exchange you would sign over 13.69% of your remaining third. At that point you've received $3,150,000 for your $3,000,000 business, exited cleanly, and the other two employees have your exit strategy in sight and won't run the business into the ground so they can pay you off. Further, even if you don't have the vote they still have a financial responsibility to you.

Play with the numbers a bit, 40 vs 45 or 1.25m vs 1.15. Whatever seems reasonable. But the idea would be they should be looking to get you out and you should be looking at some sort of value upside for holding on to the risk.

smitcat
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Re: Looking for advice in selling a business

Post by smitcat » Thu Feb 28, 2019 7:27 am

mgensler wrote:
Wed Feb 27, 2019 4:10 pm
My thoughts are 0% ownership or 100%. If you want to reward these employees and gracefully exit over time, maybe look into an ESOP.
I agree with this - 1/3 ownership also means you still have liabilities.
FWIW - the SBA backed loans out here are at about 6% , not sure where the 8% is coming from.

Murgatroyd
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Re: Looking for advice in selling a business

Post by Murgatroyd » Thu Feb 28, 2019 2:27 pm

You seem to be having a problem letting go. Others have mentioned downsides to maintaining 1/3 ownership. If you believe you are due some payback from projects in the hopper, then write them into a sale agreement.

You should sell 100%.

You are 68. What happens to your 1/3 stake if you get ill? You have all the leverage right now. Exercise it. If something happens to you, your heirs will have little leverage and likely a mess on their hands.

Sell it and don’t look back.

Silver Bullet
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Re: Looking for advice in selling a business

Post by Silver Bullet » Thu Feb 28, 2019 3:09 pm

Having just sold my business in the last few months - and now living through the angst of watching how a new owner runs it - here's my advice:
Sell the business - all of it! Take it all in cash, no earn-out. If there's an earn-out component, increase the price so you can take advantage of future growth.
Negotiate a consulting agreement to help them transition for "X" period of time. You didn't mention healthcare, but that's important if your spouse doesn't have it from another source.
If there are big opportunities on the near horizon, that weren't factored into the valuation - negotiate to earn a piece of that once it crosses the finish line (or over a period of time).

Make certain your letter of intent covers significantly all of the purchase bullet points. Who, what, when and how. Don't assume anything.

Well done on building a nice business!

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Raymond
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Re: Looking for advice in selling a business

Post by Raymond » Thu Feb 28, 2019 3:18 pm

Silver Bullet wrote:
Thu Feb 28, 2019 3:09 pm
Having just sold my business in the last few months - and now living through the angst of watching how a new owner runs it - here's my advice:
Sell the business - all of it! Take it all in cash, no earn-out. If there's an earn-out component, increase the price so you can take advantage of future growth.
Negotiate a consulting agreement to help them transition for "X" period of time. You didn't mention healthcare, but that's important if your spouse doesn't have it from another source.
If there are big opportunities on the near horizon, that weren't factored into the valuation - negotiate to earn a piece of that once it crosses the finish line (or over a period of time).

Make certain your letter of intent covers significantly all of the purchase bullet points. Who, what, when and how. Don't assume anything.

Well done on building a nice business!
What he said :D

Make a clean break from ownership, if you want to "stop worrying about the business."

Then you have time to enjoy your family, travel, sleep in late, volunteer work, whatever you want to do (or not do.)

:sharebeer
"Ritter, Tod und Teufel"

not4me
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Re: Looking for advice in selling a business

Post by not4me » Fri Mar 01, 2019 10:34 am

Largely echoing what has already been said....1st, congrats on having this situation! 2nd, I personally would sell out (if that is possible, more later). 3rd, I don't think you are ready to let go. 4th, I see huge potential for problems if there are 3 bosses.

You mentioned the 2 key employees could get a loan for $2 million -- I assume it is possible they couldn't for $3M? Perhaps that is a sticking point that wasn't explored yet & certainly affects the terms, risk, etc. Since it sounds as if they are aware of the possibility you will sell (& likely others in the company?), how might they react if you retain full ownership?

Hopefully, you have a form of succession plan already in place should you be unable to perform as boss (death, disability, etc). Perhaps you could take a sabbatical for the remainder of 2019 & put that plan in place. Would give you time to see life away from the office, let the employees adjust & see how they like working together without you, etc.

But if there is a bird in the hand now, I'd find it hard not to lock that in

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