Ian:       Welcome to the Business Coach Podcast, an advice-oriented series that tackles the top issues and opportunities facing Canada’s small businesses.  I’m your host, Ian Portsmouth, the Editor of Profit Magazine. And we’ve developed this podcast in cooperation with BMO Bank of Montreal. 

             A lot of people get into business for themselves because they want to be their own bosses, achieve a higher standard of living or even because they just feel compelled to bring their better mousetrap to market.  But in the back of their minds, they’re probably also thinking of the day that they will sell their successful business cashing out on their own terms and on their own schedule.  If only more of those dreams would come true.  The reality is that many business owners feel forced to sell at a time or a price that is less than ideal.  So what are their options?  According to Doug Robbins, they are 14 alternatives to selling one’s business.  Doug is the founder of Robbinex Inc., a Hamilton-based business broker and consultant that aids the buyers and sellers of private companies.  He is also the author of There’s always a way to sell your business, 100 tales from the trenches by a master intermediary.  Doug joins me by phone from his office in Hamilton.  Doug, welcome to the Business Coach Podcast.

Doug:   My pleasure.

Ian:       So Doug, referring back to my introduction there, in your experience, what percentage of business owners actually do end up selling on their own terms and according to their schedule?

Doug:   Oh, it’s a very small percentage Ian, I would say 10-12 %.

Ian:       And what are the most common external forces that push business owners toward a sale that they might want to do without?

Doug:   Well, they are usually things that they can’t control.  Number one is their health.  Number two could be the health of an employee.  In fact, I just had a client who has a very key employee that came down with cancer and this client is right up against the wall because of this particular problem.  Other times, it could be an accident, sometimes it’s things beyond their control, things like the economy and the recession, obsolescence built into the technology, customers changing from them to competitors, the list is endless.

Ian:       Now your book dedicates its penultimate chapter to the 14 alternatives to selling.  So I want to start with number 13 on your list and that’s advisory boards, a topic that we’ve covered at great length in Profit Magazine.  How can an advisory board help in a potential sale situation?

Doug:   Well, an advisory board walks into a situation that is usually unique and what they bring to the table is skills and experiences that the owner has never gone through.  When I put an advisory board together, it’s usually because we’ve got a two, or three or four-year business plan to exit.  I like to see a competent lawyer who specializes in merges and acquisition.  I like to see a forward thinking accountant who can look fairly closely to the future in conjunction with the client.  Sometimes, we need marketing agents, sometimes we need a turnaround specialist, there is just a whole myriad of potential activities that the client needs to look at in order to get the best value for his business.

Ian:       Now do firms with advisory boards tend to achieve higher valuations than firms that don’t have advisory boards?

Doug:   Absolutely, 15, 20, 30% more can almost be guaranteed. 

Ian:       And are advisory boards necessarily paid positions?

Doug:   Not very often.  Usually, it’s somebody who’s got experience and you cross refer with them.  If you sit on their board, they’ll sit on your board and their experiences are different so you’re bringing different experiences to the table.  So often times, there is no cost involved but an obligation to sit on another board.

Ian:       So you get a great return on that investment.

Doug:   Absolutely.

Ian:       Similarly to hiring an advisory board, which is basically bringing in expertise that you need to get your company through a specific challenge or even just to maximize the value, is to hire a competent manager.  How can that help?  When does that happen?

Doug:   Often times, the owner of the business gets locked into so much activity, so much detail, he is probably working 75 or 80 hours a week.  And the key there is he is working, he is not managing.  So if we can bring a manager in to do some of the work that he is doing, it’s going to free him up so he can become not a worker but a manager.  And the real value in a business is that it’s managed properly, not that it’s worked properly; a very subtle difference but a very powerful difference.

Ian:       And I guess the ultimate example of that is actually replacing yourself as the CEO of your company.

Doug:   That’s often done but then you have to be very careful that you got a very clear delineation of authority, responsibility and expectations for that manager and the proper milestones in place to ensure yourself that he is doing the job that needs to be done.  Often times what happens is the owner will hire somebody and go to Florida and expect everything just to run perfectly.  Of course that manager doesn’t really necessarily know or understand the 40 or 30 years of experiences this person has put into the business so he is going to do things differently and he may not meet the needs or the wants of the business as the owner sees it.

Ian:       Now, a lot of business owners are highly entrepreneurial type-A personalities and they might be in denial about the value of bringing somebody in to help them manage the company.  They might see as a bit of a sign of failure.  So what advice can you give to business owners who struggle with the notion of surrendering some degree of control to a hired gun, so to speak?

Doug:   Once again, it comes back to freeing up your time to do other things in a pro-active manner.  And so, if you’ve carefully crafted the job responsibilities, the duties, the authorities, the expectations, the milestones, all those kinds of things, it ought to work.  Sometimes, you might have to go through one or two managers to get the right person but other times, most times if you do it properly, you will score right at the beginning.  And, you have to not be in a hurry to do it.  Some people, I got to do it, I’ll hire somebody next week, it becomes part of a plan.  It might take you two or three months to find the right individual.

Ian:       Now, number four on your list of alternatives to selling is empowering employees to help you overcome the many challenges that can frustrate and of course eventually burn out a business owner.  I wonder specifically whether employee share ownership could be part of this particular solution.

Doug:   I don’t recommend it.  In fact, I am vehemently against it.  When you start sharing ownership, you’re creating partnerships, life expectancy of most partnerships is 3 ½ years; it’s just a recipe for disaster.  What I do recommend is bonus programs based on defined achievements being made or even profit sharing based on defined achievements being made.  So the person who’s working for you knows when he has accomplished what’s expected, he is going to be compensated.  But to make them a partner, wow, that’s just asking for more problems.

Ian:       So raise the stakes without sharing equity.

Doug:   Absolutely.  Do not share equity, never give equity away, it’s a golden rule we have.

Ian:       What are the options for entrepreneurs who are struggling to make financial ends meet?

Doug:   Well, your advisory board can often help you there.  Once again, business is so complex and so frustrating, it’s really hard to know that the solution is until you get involved in the particular business, in the particular issues that they are dealing with.  Sometimes, your bank is an easy solution, sometimes you are into factoring, sometimes you are into long term financing, sometimes you are into private financing.  Often times, you can go back and deal with some of your major suppliers and get extended financing from your suppliers, once again depending on the situation.  So what needs to be done is a careful assessment of the challenge and the problem that the client is dealing with and then go back and say, how do we deal with it the best.

Ian:       Now number 14 on your list is to buy your partner out.  We know that many entrepreneurial marriages end in divorce.  But what prompts partners to sell the entire business to an outsider rather than one buying the other out?

Doug:   One of the reasons could be the lack of a shareholder buy-sell agreement and they can’t reach an accord or an understanding of what they are going to do.  Often times, there is viciousness between the partners and there is no way I will let that guy have it, I’ll destroy it first.  I have walked in on a number of those over the years where the business is virtually disassembled because they can’t agree on selling it.  So selling it out if one can’t buy the other is often times the only way.  I could sit here for an hour and tell you stories about people who terminated a partnership inappropriately and left a lot of money on the table.

Ian:       In your opinion, should a shareholder’s agreement always have a shotgun clause that governs that buying and selling?

Doug:   Well a shotgun agreement in business to me is like the atom bomb; once you use it, everything is destroyed, all communications stop, all common sense stops, it’s purely emotional.  I had one client who pulled the shotgun on his partner when I knew the partner would negotiate a more favorable deal than he was even offering.  But because of the shotgun being pulled, he reversed it and my client actually went to a psychiatric ward for six months because it just blew his mind that he lost the deal.  And he could have negotiated his way out of it for much more favorable terms and both parties would have been happier.  So I like to see a client have an agreement in place that says, okay, who’s going to buy – what partner.  One partner is usually stronger than the other, he should be the buyer, what terms and conditions would he buy, how do we formulate the value and how do we pay it out?  And if we run into difficulties with that, I would like to see a mediator brought in or even after that an arbitrator.  The shotgun agreements generally are not equal because one partner has all the skill or the other partner has all the money.  And so, the reciprocating partner is held to ransom.

Ian:       Now on your list of the 14 alternatives to selling your business, you might add number 15 Paul and that’s do nothing.  Can you explain when you should do nothing?

Doug:   If we got a moment here, I will just share a short story with you.  We had a client come to see us and said, okay I want to sell my business, I want to put my affairs in order and we looked at the business and the business was a wonderful business, the guy was only 46, he had started it when he was 30.  He was making a million dollars profit a year and paying himself a quarter of a million wage on top of that.  And the prognosis of the business was very strong.  When we pushed him as to why he wanted to sell, he gave us a lot of fubbely reasons, so we brought our psychologist in who interviewed him, ran some brief surveys on him and came back and said, this guy is one day away from having a nervous break down.  He needs a vacation, he needs to be removed from the business for at least 4 weeks.  We brought his father in who used to work with him and his father operated the business for 4 weeks, his wife took him to an island for 3 weeks with no telephones and no internet.  He came back to work 2 weeks later, called me and said, this is the best thing he ever did.  I talk to him every year now.  That was about 5 years ago.  He really didn’t want to sell but he was just burnt-out and stressed and didn’t know how to deal with those issues.  So in that case, all he needed was a vacation.

Ian:       That’s a great story and a great reminder that sometimes, the best course of action is no action.  Doug, thanks for joining the Business Coach Podcast.

Doug:   Oh, my pleasure.

 Ian:       Doug Robbins is the founder of Hamilton-based Robbinex Inc. and the author of There is always a way to sell your business 100 tales from the trenches by a master intermediary.

             That’s it for another episode of the Business Coach Podcast.  Be sure to check out other episodes which you can download from BMO.com/coach, Profitguide.com and iTunes.  For other tools to help you build your business, visit the small business resources section on BMO.com.  Until next time, I am Ian Portsmouth, the Editor of Profit Magazine, wishing you continued success.

 

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