Five Steps to Retire and Sell Your Business – Retirement Planning

This is the transcript:  

Andy: Well hi everyone! I hope your week is going well. Now here is what we’re pondering – you’ve successfully started and grown your own business. But now, you can start to imagine the day that you might want to spend more time on the golf course with the grandkids or just hanging around the house and driving your spouse crazy. Well, it isn’t quite time to retire yet, but for the first time, or maybe more, you can envision selling your business. Well I recently spoke to a guy who does just that for a living. Now his name is Michael, forgive me if I don’t exactly get this right, but his name is Michael Schwerdtfeger. And well, let’s let Michael explain the rest.

Michael: Sure Andy. Thanks for having me. So my background is pretty varied. My main part of my career has been as a Fortune 500 deal attorney. I did a lot of commercial transactions for Fortune 500 companies. But before that, I actually started as an engineer along the way and I got an MBA as well. I looked a variety of times through my career to become an entrepreneur myself but realized that my passion and my experience was in doing deals and doing transactions. I also found out that I really enjoy the entrepreneurial marketplace rather than the Fortune 500 marketplace so I decided that going to the lower mid market and helping people get transactions done in the lower mid market was really rewarding for me.

Andy: Well it looks as though you’ve been doing this for about 20 years or so and I’m sure during that time you’ve seen an awful lot of situations where people who had a plan in life and, say after 55, they man a business. Maybe go into a little bit about thought process that you’ve experienced with the people that you work with.

Michael: Yeah, sure. There’s really two sorts of people that call me to sell a business. One of the type of people that just simply want to retire, the second, and these aren’t always mutually exclusive, are people that want to continue to grow their business but have reached some sort of constraint in their day-to-day business life and sometimes they just don’t have enough money in their wallet to grow their business as fast as they like or they need additional resources whether that’s skills or experience or people. So usually, people come to me with one of those calls, either they want to grow their business or they want to transition out of it. And the many times those are again not mutually exclusive.

Andy: So I’m just trying to put myself in this situation. If it’s something that you’ve put your heart and soul into for generally a long time, there must be a lot of anguish I guess or maybe excitement or there’s just a lot of emotions going on. Can you talk about that a little bit?

[3:00] Michael: Yeah, I can, absolutely. You know, I would say I’m a psychologist first and an analyst in transactional business person second. Because of what you described, I mean most of my clients have lived with their businesses for years and years and years. A lot of the work I do is just simply helping them understand sort of what the transition looks like, where they need to go in order to successfully reach the goal they’re looking for. So you’re actually right, there’s a lot of emotions doing these transactions and that’s often the most difficult part of it, the transaction.

Andy: So where are they at generally at this point? Are they just kinda kicking the tire is it deciding well, is this something I should do, or come to you or you help them decide out. Typically, where is somebody at this point?

Michael: You know Andy they’re all over the map, anywhere from thinking about this 5 years from now to, you know, I really need to do this right now. And I really prefer to start talking to people when they start to think about doing a transaction. And the reason for that is simple, there’s a lot of really great things to increase the value of your business if you plan in advance. It doesn’t take that much work. It’s something that, you know, over the course of three or four or five years, it’s pretty easy to do. But trying to accomplish the same things the day or two before you retain a merger acquisition advisor or an intermediary, it’s difficult to make the same impact on your business.

Andy: And then too, if someone is contemplating retirement, in many cases, they have other passions maybe that they wanna do. They wanna travel or spend more time with their families. So, I suppose I have to decide, okay, what are they gonna do? What are some of the options that they can consider in terms of how they get rid of it?

Michael: Well, you know, a lot of the folks that do sell their businesses, they lived with it so long, it’s really difficult to make a clean break from the business, and that includes people that wanna retire or people that wanna continue to grow the business. So a lot of times, there’s a continuing role for a couple of years or even more than a couple of years within the continuing organization of the company, you downstream with the transaction. The other piece of it is making sure that these business owners have planned in advance for the economics of not being able the owner of the business anymore.

Andy: That’s a good point because that cash flow that they got used to, it’s gonna be different now isn’t it?

Michael: Yes, absolutely, absolutely. Usually the cash flow that people can generate by putting the proceeds of a transaction into an investment, it doesn’t quite match the proceeds that they get from the business itself and that’s partially related to the fact that a lot of people who have a lifestyle that’s within the business, that’s difficult to replicate without the business.

Andy: So what are you seeing in this time in terms of what’s going on out there and is this a good time for someone to be thinking about that or not?

Michael: Yeah I think it is. You know, obviously, the last few years was not exactly the best time to sell your business. But I think what’s happening now is that there’s a lot of excitement in the marketplace for businesses. We’re seeing, at the high-level of Fortune 500 mergers and acquisitions, we’re seeing massive amounts of buying and money being spent this year. And that’s some expense translating down into the lower mid market. I think what’s also happening is that there are lot of people in the baby boomer generation that are getting ready to retire and you know I think that being in the front end of that cycle is probably makes more sense than waiting to be the tail into that cycle.

Andy: Yeah, that was gonna be my next question. Not that you’re a forecaster or an economist but you must have some sense about what’s gonna be taking place here for the next 15 or 20 years is the baby boomers starts stepping away from that.

Michael: Yes, and the wisdom of that there are going to be a lot of businesses for sale and a lot of businesses that transition over the next, you know, 10 to 15 or more years. So yes, I mean everybody believes at this stage there’s going to be an uptake in the businesses that I can work with in the lower mid market in terms of the number that are being sold over the next few years.

Andy: And again I guess you also talk to people who maybe are torn between handing the business down to heirs or to selling it. Can you provide any kind of input on the type of thinking that goes on there.

Michael: Yeah, you know, it’s a difficult situation Andy. There’s a lot of people that want to transition their businesses to their heirs, to their children, to their relative. But I will tell you that in most cases where I talk to clients, it isn’t really a good option and it’s often because the business owners’ children or grandchildren or what have you are not really interested on the business, their skills aren’t really in the same direction as the original founder of the business. So, often, what sounds like a great idea to transfer the business to the kids, it isn’t something that works out as well as you’d think it might overtime. So I feel that a lot of business owners that, you know, they come to me and say, “well I thought I was going to do that, but now I’m more interested in selling the business”.

Andy: And now you commented a little bit about the process that goes on here and I can only imagine that it’s complicated. So it’s not an overnight thing, I mean, typically, what is the process that goes on from, I guess, initial meeting to selling and so on?

Michael: Andy, that’s really a two-phase question, I think. The first phase is how long do it really take to plan to do a transaction well. I think it probably takes a couple of years to plan to do a transaction well and we can talk about that in a couple of minutes. In terms of the actual transaction from the time someone calls me and says, you know, it’s time to sell, please start. It’s usually a 6, 9, or even 12 month process to get that transaction completed and often, the seller will remain with the business for another year or even two years after the transaction. Realistically, the time you start thinking about it to the time, you know, you’re on the golf course or in the Bahamas, you’re talking about 4 or 5 years.

Andy:  Yeah. Now how does someone find out about you? I mean, you know, this sort of thing obviously is one way and hearing your expertise on something. But typically, are you referred to somebody from someone else or how does the process work, you know, if someone is contemplating selling and they need to talk somebody like you, how do they go about doing that?

Michael: You know I think in today’s world I think like everything else the Internet is a good way to find people. You can certainly look to see who has expertise in your space. I think it’s important to find somebody that really fits with the type of business you are. There’s a lot of people that work with very, very large businesses that really don’t fit with the, what I call, the middle market. There’s also what I call business brokers, mainstream business brokers that deal with the lower end. I happen to be in the lower middle market, we’re merger and acquisition advisers. We tend to deal with companies that are anywhere from the 5 or so million dollars in revenue all the way up to 100 million dollars in revenue. But I think just doing a little bit of research online and looking for the sorts of people that can help you is probably a great way to start.

Andy: And what kind of businesses are we talking about? Is it just cover the whole spectrum of from mom and pop to liquor stores to car dealer. What typically are the types of businesses if there is any typical situation?

Michael: In the market, completely, it ranges the whole [11:58 cannot understand], I mean from the liquor store, you’re talking about all the way to a hundred million manufacturing business. There’s different niches.  The types of businesses people like myself handle, the liquor stores and the very small mainstream types of businesses, I tend to handle that are larger than that. I tend to handle things that are little more sophisticated, have a little bit more revenue, have a little more bottom-line profit – things that require pretty significant acquisition. I think the difference is… the easiest way to describe the differences in what you’re looking for is kind of who’s the buyer for the types of businesses that you have. The mainstream business brokers tend to sell to, as you call it, mom and pops. Most of my businesses tend to be sold to strategic acquires – people that are in the business, sometimes public companies, sometimes large private held companies, or to a financial buyers that are in the private equity world.

Andy: Well listen, I kind of set this stage here a little bit hopefully and then from that point on, let’s say you get the green light and you’re starting to move forward. So maybe you can talk a little bit about some of the steps that someone should do or how you would advise them, you know, let’s say step one. What might be the first thing?

Michael: Well, I think it’s the timing. It depends on where you are in the process. The best advice I can give people is, if you’re really interested in selling your business sometime, talk to somebody like me today. And it doesn’t matter if that sometime is tomorrow or sometime is 5 years from now. In fact, it’s better if that sometime is 3 or 5 years from now. People in my space, we love to give advice well in advance because we know we can help people in advance. So I think that the key is start early and get advice early and don’t wait because you can do some really good things in the early stages.

Andy: Now I know that, for example, one of the bits of advice you have is get your management team in place and make sure it’s where you want it to be. What does that mean?

Michael: Sure. A lot of businesses, even very substantial businesses in my experience, they tend to be driven by the owner. The owner tends to be the one to have relationships with all the customers. And that’s a difficult to transition when the owner wants to sell or the owner wants to leave. So it’s really important to institutionalize the company, make it a little bit more corporate, make it a little bit more sustainable, and the way to do that is to bring in some people and invest in people as you go forward. Bring in a chief of sales. Bring in a controller or CSR. Bring in the types of skills that’s gonna make the company sustainable even without the owner.

Andy: And then you wanna have a paper, I guess a paper trails as you wouldn’t want everything just to be done on a handshake relationship though that might work well as the individual owner, but if you’re trying to sell it, you have to upgrade things a bit too, isn’t that right?

Michael: You do Andy. I have a lot of business owners tell me “well, my financials are good enough for me”. And that’s great and I completely understand that sentiment and for the most part, businesses that are really keeping financials for the largely for the purpose of reporting to the IRS, I understand that whatever you done is probably fine. But when you are doing transaction particularly in the middle market that I work in, you’re really looking to be acquired by somebody that is either a lender themselves or definitely a professional investor themselves or at some point will involve a bank to provide dollars to the business. So you have to be able to talk their language and you have to be able to paint the picture of the company that they understand and for that reason, you really need to start implementing financial prophecies within your company that are usable by professional investors and lenders. While you don’t necessarily incorporate gap financials, it certainly doesn’t hurt to bring in an outside accountant that can help you along the way to implementing some of those types of processes. And at the end of it, a lot of businesses just use the internal financial accounting to file their taxes. I highly recommend that in the last year or two before a company’s getting ready to sell that they have their financial auditor or reviewed by an outside accountant. It will make the transaction process a lot easier. And Andy, I mean I’m obviously referring to businesses that are kinda in the middle market unless… I don’t think it’s necessary and applicable to the liquor store or small mainstream businesses.

Andy: Now how long would someone expect to… I guess we’ll call it the DOB and again we’re talking in generalities, but would someone expect to get a lump sum payout or are they getting paid over a period of time paid back. How does that work?

Michael: Yeah that’s a great question. I think that… most of the clients that we take to market… the deal is a combination of dollars at closing and dollars are at risk to the business owner. And the real reason for that is because the buyer wants to make sure that the seller is encouraged or incentivized to make sure the buyer successful in this transaction. So sometimes, depending on the transaction, sometimes the seller will keep continuing ownership, small ownership, stake on the company, or he’ll loan back a small amount of money to the company, or you take something what you call earn-out where the company pays the owner overtime based on the success of the company going forward. But it’s usually… I would say a majority, although not a strong majority of cash and a minority of these other tools.

Andy: And then with all of these going on and all of these financials being discussed and moving around here, you probably need to talk to someone who’s in a state planner that can help you put all everything in place for now and down the road.

Michael: Yeah, that’s right Andy. I think that in the sort of planning we talked about earlier, I think it’s important that a company gets the appropriate tax advice and a state planning advice because there are a lot of things that a business owner can do today if he intends to sell the business five years from now. And you know, as an example and I’m no expert in this, there are a lot trust vehicles where you can transfer a portion of the business into a trust today at a valuation that doesn’t assume there’s going to be a sale of the company and then five years from now when you sell the company even though the company have increased in value, you can minimize some of the tax exposures because you already done the transaction five years in the past. So there are a lot of really great tools that can make sure a business owner ends up with as many dollars in his pocket as possible. But again, those are things that can be done in advance. It’s a lot harder to do it once you’ve put the company on the market and have an offer in your hand.

Andy: And then of course if I’m the buyer, I want the surest thing possible so as a seller you wanna make sure that you’ve removed all the risks that you can.

Michael:  Yeah. And that’s sometimes harder to do than it sounds. But a business owner really should think about it in advance – how he can make a deal safer for a buyer. Buyers, at the end of the day, hate risks. I think, they rather not lose money than make money and losing money, for professional investors, is really a no-no and that’s something they don’t wanna do. They wanna make sure there’s no risks in doing the transaction. So making sure you have important contracts tied up, leases, any other relationships that are important for the business, those are the kinds of things that are really good to try to tie up while you’re planning the business. You know, similarly something that creates a lot of risks for people and this is difficult and it’s good and bad is customer concentration. A lot of companies, smaller companies in particular, are successful because they get a really big customer and they are really able to grow the business around the big customer. But of course, there’s a lot of risk in that because if the customer leaves or goes away for some reason, you know obviously the value of the business declines. So to try and make sure that you don’t have a lot of customer concentration in the business, again, not the easiest thing to do today, but over the course, if you know that you wanna sell five years from now, try to manage your customer concentration. Sometimes, it’s a good thing to do.

Andy: As we wind up on this Michael, any kind of final points or any takeaways to someone, you know, might work on here and as far as next step or any points of advice.

Michael: Yeah. Planning, Andy, it really amounts to planning. It’s so much easier to get a good transaction done whenever you’re looking to deal if you spend some time planning for it. Businesses are relatively complex to sell. I mean, it’s not like selling your house. There’s a lot of work to be done and a lot of complexity in the transaction. So getting an appropriate team in place, calling someone like me, calling you’re making sure you have a good accountant on your team, making sure you talk to your planning team, is really, really important.

Andy: Well, this has been great Michael. And once again, how do we get a hold of you about Five Steps to Retire and Sell Your Business – Retirement Planning.

Michael: Yes I have a site. It’s a website that people can also find information on the Internet. It’s mbsmergers.com.

Andy: Well this has been really fascinating. Well, I think that, well as you said, there will probably be quite enough taken the number of boomers looking at selling something they put their heart and soul for a long time.

Michael: Yeah, absolutely.

Andy: Thanks so much for your time Michael.

Michael: Thank you for having me Andy. I appreciate it.

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