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Key Idea: Sell to Someone Close to You (3)

Jim Schell sold one of his companies to employees who had demonstrated their ability to take the business and make it grow.  More...  Related...

Key Question:


Peter took the anonymous road and Lorraine took the friendship path. Peter wrote an ad (just like an advertising man, right?) and ran it in the Wall Street Journal. He described the type of person he was looking for which was the way he found a person like himself.

Lorraine told her banker friend that she wanted to sell and it turned out that she had more than one offer. The person who "won the right" to buy the business told Lorraine that he loves plants and that was the opening of the buy-sell negotiations. Because she was able to sell to a plant lover, Lorraine felt good about the sale. She felt that the employees and customers would be happy because the new boss is in simpatico with the founder.

The big bonus for Peter and Lorraine is they didn't just get money for their businesses; they transferred the business to a person that they felt would keep the business much like they found it.

Questions for this clip: 1 | 2

Think about it

Who surrounds you now? Who knows the business inside out? Who might want to learn the business inside and out?

Clip from: From Equity to Exit Strategies - 8 Possible Paths

The world:  Most of us small business owners do OK competing with the big businesses in our industries or we don't survive. But when it comes to our exit strategy and succession planning, most of us fall on our face.

This episode is to explore business valuation and exit strategies.

An exit strategy is just like doing a will, but here you try to maximize the dollars you get out of your life's work.   Nobody wants to see you liquidate. That's getting pennies on your dollars. Tangible assets get sold (fire sales) and the intangibles are lost forever. Liquidation is the worst kind of liquidity.  

Most of us will sell our business through merger or acquisition. But, if we get much over two-to-three times sales or six times earnings, we all think we've done very well. Yet, when big business sells, they usually begin at six times earnings. Then we see 40 times and even 300 times earnings on the open markets. Why should we be satisfied with so little?

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We all must prepare today for the invevitable tomorrows.

Small Business Owners Everywhere in the world, We all will exit our business someday.

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Sell to Someone Close to You (3)

HATTIE: Number three. Sell to someone very close to you.

(Sell To An Employee)

HATTIE: So when should someone have an exit strategy?

JIM: Everyone should have an exit strategy. After all, we're all going to exit, right?

HATTIE: Yes. (Voiceover) Jim Schell tells how he sold to key employees.
JIM: The seller sells the future; the buyer buys the past. So you want to try and make a case for the fact that, `Oh, if we only had such and such here, the business could go up somewhere.'

And so the role there was for me to try and make a case for the fact that the business had all this potential so that the buyer would say, `Oh, wow! All I have to do is throw this at the business and it's off and running.'

HATTIE: Let's talk about how you sold that business. It's $2 1/2 million. It's retail; it's wholesale. It's in the sporting goods arena. How did you do it?

JIM: Because of the second business, I'd been kind of phasing out for a couple years, so customers, employees didn't even notice. And the buyers, the two key employees, I gave them the sweetest deal I could because I trusted them and they were friends and it worked out for both of us. And today, they're a very healthy $6 million company and everybody lived happily ever after. I took 10 percent down and I think I gave them 10 years to pay it off, because I knew it was going to work. They were good people, and they paid it off in three years-- which, incidentally, is kind of a rule of thumb.

If you can't buy a business and pay it off in three to five years, maybe you're buying the wrong business.

(Sell To A Relative)

HATTIE: (Voiceover) This is a 21st century blacksmith shop. Tell me, what do you do here at Quality Bending?

MATTHEW SEELY (Quality Bending & Threading, Detroit): Well, basically, we fabricate custom fasteners to a particular engineered design.

HATTIE: Russ, do you really think this guy can run this business?

RUSS SEELY (Quality Bending & Threading, Detroit): I'm convinced he can, now.

HATTIE: (Voiceover) In 1960, Russ Seely started Quality Bending and Threading, and in 1990 he happily sold the company to his son, Matt.

HATTIE: So some advice to other sons or daughters who are getting into their parents' businesses. Use some outside help?

MATTHEW: Definitely. Definitely. And I would say really, I think one of the things that my dad and I did right, and we didn't even know we were doing it at the time, is the CPA was a longtime contact--in fact, it's my uncle, it's my dad's brother-in-law--and they were longtime partners in the sense that he has always been the CPA for this business.

HATTIE: So he knew the CPA knew this place inside and out.

MATTHEW: Right. And then I chose somebody that I felt comfortable with, so we both felt like we were being represented, and even though we're father and son, there are some issues that become pretty touchy when you're talking about, you know, someone's life's work and a large amount of money and the transferring of that, and I think it's good for each side to have a little independent counsel where the counselors can talk to each other and represent the misgivings or any of the fears that that party may have.

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