Succession: What Timeline Should You Be Looking At?

[00:00:07.500] - Dan Paulson

Hi, everybody. Welcome to Books and the biz. We are back again. Hi, Rich. How are you doing?

[00:00:14.030] - Rich Veltre

I am good, Dan.

[00:00:14.790] - Dan Paulson

I am doing wonderfully. Well, today is another extension of our five questions. We've pretty much been working down our list of the different questions you need to ask yourself if you're looking to sell your business or pass it on to somebody else. I thought this would be a good topic to start talking about timelines. Because as we all know, people's timelines and actual timelines are two different things. I don't know your experience, Rich, but everybody that decides they want to sell seems to want to sell right now.

[00:00:46.690] - Rich Veltre

I definitely understand that point, that comment, because I've seen it all the time. You have a bad day and suddenly it's well, I'm going to retire. Okay, what does that mean?

[00:01:01.170] - Dan Paulson

Well, what happens when they have several bad days? Let me tell you how much quicker they want to retire then, because I've heard that from a couple of people, especially given the hiring situations that we're in right now. Just the difficulty of finding good employees is really causing a lot of small to medium sized companies question whether or not this is something that's worth their time to continue on with. But as we both know, there's a lot of steps that go into making sure that you have a sellable business and that time frame really does matter.

[00:01:33.010] - Rich Veltre

Absolutely. Absolutely does, 100 %.

[00:01:35.500] - Dan Paulson

So when we're looking at time frames, I'm not sure where you're at with things, but I guess we should talk about what's the risk to a company when they don't consider the time frame, when they really do just say, you know what? Get me whatever for this. That rarely happens because most of them have a number in their head. And to me, the shorter the time frame is, the more fictitious that number tends to be, because there are a lot of things that aren't put into place. There's really no structure is what I find. Most of these guys, they started the business or they bought the business at a very early stage, they've grown it and they've managed pretty much every component of that. And it's very difficult from that standpoint to then go, oh, here's the keys. I'm done. Somebody else take over, because whoever comes in then has to basically rebuild that structure all over again. From an operational side, the shorter that window is, the more discounted that business is going to be because the new owner knows they're going to have to put a lot of work into getting that business where it can run by itself.

[00:02:47.060] - Rich Veltre

Well, the financial fall is exactly that same scenario. When you shorten up that time frame and it's not planned for, you can expect that that suspected number or that anticipated, this is the number that I want, will start to drop. And then the other thing that will happen is once you start going through a process, even if you found a buyer, one of the things that would actually happen is I think your timeline would actually get pushed out because you'd be sitting there saying, Well, I wanted this number, I didn't get it. And the reason you didn't get it was because you didn't plan for it. Let's take it for real. Most people can get a number in their head based on what they think their business would be worth because they know their industry. So they know a idea of what their business should be worth. And I use the word should in bold, italic and underlined. The should becomes the problem because if you shorten that time frame and you don't plan for it, you won't get that number. You just can't. It's not physically possible.

[00:03:52.780] - Dan Paulson

Well, from the operations side to that respect, I liken this to selling your home. There is what you believe your home is worth, which is always more than what... Or most of the time. There is a few rational people out there. But most people, again, this is an emotional decision. So typically they look at it from a standpoint of, well, my house is better than everybody else's, so it's worth X. The realtor comes in and says, Well, really, here's fair market value compared to other comps in the area. It's worth Y. Then there's the buyer that comes in and says, Well, I don't care what you guys think it's worth. This is what it's worth to me. That's usually Z, which is the lower number of the three. When I look at from the operations side, talking to the owners, I'm hearing pretty much the same thing. Well, my house is great because it's highly profitable. It's well run, it's well managed. Okay, let's now do some comps on the area. What happens when you leave? Well, I don't know. I guess everything goes on like it should. Okay, tell me about the last time you went on vacation.

[00:04:56.300] - Dan Paulson

What did you do? Did you take a vacation? Well, I checked in every day. I got calls and I had to tell others what to do. Okay, what happens if you couldn't answer the phone? Well, then I came back to a mess. Well, then you got some leaky pipes. We need to get the plumber in here and fix some things. It's that same mentality that while everything might be running well in their world when they're there, it's when they're not that things fall apart, which often is also part of the reason why they want to sell in the first place. Because if everything was running like a fine-tuned watch, they wouldn't need to worry about if they were there or not.

[00:05:37.840] - Rich Veltre

Imagine that if you were out on vacation every single day of the year, the business was running and sending you cash, you probably raised your expectations of what you get from selling it.

[00:05:47.960] - Dan Paulson

Well, and sometimes isn't that something you should look at and we'll discuss what is it you want in future episodes? But in some ways, I look at some of these business and I'm like, why would you want to sell? If you could really get this thing running efficiently on its own and build up the right leadership team, why not treat this as your residual pension fund? It can just keep printing cash for you if it's really running that well.

[00:06:11.700] - Rich Veltre

I had an example of that. I had a gentleman who owned a business that he had taken from his father and built it even bigger. And funny part was it was a very unique product, and the factory is right smack in the middle of Newark. And the fact of the matter was it was just one of those businesses that was so profitable. You had to ask the same question, like why wouldn't you try to hang on to it? Someone in the family should hang on to this because there's no way you're going to replicate that. You're not going to move to a different business that day and say, well, now I'm going to do just as well. Well, I think the uniqueness of the product was a huge piece of their puzzle.

[00:07:00.770] - Dan Paulson

It's always nice when you can find those businesses that have that. They've just got that small corner of the market and they're big enough that they're quite profitable, they do well, but they're small enough that they're really not on anybody's radar. And I've seen a few of those where they have sold and they're wonderful businesses because they just run like clockwork and they print money. And really the new owners just sit back and take it all in. But again, those are very few industries or businesses that you can get away with that.

[00:07:34.430] - Rich Veltre

Right. In that case, he really was an absentee owner. From a sales standpoint, he was still very much involved. But the people there knew how to produce the product and he wasn't sitting there producing the product. So that made a big difference in what he would be able to even think about doing. But I think it does come back to that actual question, though. And I think we've talked about this before that how involved is the owner slash founder slash seller? How involved are you? You asked it, when was the last time you went on vacation? Because a buyer has to be able to replicate, at least replicate. They don't want to just replicate. They want to move it forward.

[00:08:22.520] - Rich Veltre

So how involved are you? Because that's going to be a massively important question.

[00:08:29.950] - Dan Paulson

Now we should probably talk about when it comes to timeline. There's many different timelines we can work from. There are a few turnkey businesses like we've talked about that you can just hand over the keys and everything's going to run just fine. Vast majority of companies aren't that. And then there's different gradations, if you will, of when should you start? And I'd be interested from a financial side, what is it you have to really look at to say, okay, this business is now ready to sell. And how far back do you have to to work your timeline to say, okay, if you're going to sell today, you should have started X by however many years ago. What things do you look at from a financial perspective that that the owner would need to know?

[00:09:21.510] - Rich Veltre

Well, I look at what I think or what I suspect the buyer or potential buyer is going to ask me for. So if the buyer is going to come in and say, I want to see X, there's my list, and nine times out of 10, it's not two years of financials, it's probably three. It could possibly be four. I would say depending on the size and depending on the circumstance. I mean, if you've only owned a business for a few years, I don't think they're going to go back to, well, let's look at the owner before you. So if you've only owned it for three years, I don't suspect they would go to that fourth year. But most of the time when people are asking me to get involved, we're looking at the last three years of financial statements. And so there would be my starting point. If you're really thinking about selling, I'd be prepared that they're going to ask you for three years, I'd want to be ahead of that three-year period. So I'd be thinking about it now if I wanted to be three years from now, I want to be out.

[00:10:23.340] - Rich Veltre

And on top of that, you might want it to be a little bit... You might want to plan on being a little bit more than that because a lot of times in a business where the owner is very much involved, they may want you to stay on for a year or two afterwards. It's not just these three years. It's, I got a five-year advanced timeline.

[00:10:44.060] - Dan Paulson

That's a good point because there are a lot of when transfer of ownership happens, I almost always see some contingency in there that the owner must stick around for at least 12 months, sometimes 24. But usually that first 12 months after the transfer of sale, they're there almost as a consultant to help with that transfer and make sure that goes as smoothly as possible. A lot of that is related to the sales side of things, maintaining the customer relationships, because that's usually the weakest link here. Once the customers know the owner is gone, there's a lot of fear involved of whether or not the operation is going to maintain the same amount of quality that it did when the owner was there.

[00:11:28.690] - Rich Veltre

Yeah, I definitely have seen it. The other thing I would throw into there too is they just actually extended this, I believe. But if your businesses say in that $5 million range, a lot of smaller potential buyers will use SBA financing, which I think their limit is $5 million. But they also just changed the rules on that financing that the owners used to only be allowed to stick around for 12 months. Sba requirement used to be that the old owner had to be out in 12. They've now extended, I believe.

[00:12:07.240] - Dan Paulson

To 24. Okay. That would make sense.

[00:12:11.600] - Rich Veltre

That would give you a number. It would also give you the addition to the timeline, which when I said two years, that's what was in my brain.

[00:12:21.070] - Dan Paulson

Other financial stuff that you need to be concerned about besides the general reporting of the financials? Is there other things that you look for?

[00:12:29.830] - Rich Veltre

I don't think that there's a... The reporting is huge because the reporting gives you an idea what that valuation is. It gives you an idea what they're going to ask for. It also comes down to what the owner was paid during those times because sometimes they have to look at adjustments. So your financials might be absolutely perfect, but there are things in there that the new owners will say, We're just not going to do that. Or the owner of the business might have been taking a certain salary, but fair market value was more than that to pay someone else. So you have to worry a little bit about what are the adjustments that the buyers are going to suggest are going to make negotiating points. I don't think that necessarily changes your time frame, except for the fact that if it's a negotiating point, you're going to have some back and forth. So if you thought you were going to sell it in 90 days, it might not be 90 days, it might be 120 days. Because you're going to have to build in some more time for that negotiation.

[00:13:41.240] - Dan Paulson

Well, some of the stuff you were bringing up definitely changes the timeline for me when I look at a company. As you point out, if the owner is very involved and they're pretty much that's their salary is they're handling something that maybe three or four other people are going to have to handle on their absence. I really have to look at how long is it going to take A to hire, B to train, three to get to proficiency level where we know that they could run the show without the owner being there. My rule of thumb tends to be about five years. You were saying three with possible extension of two more. I'm looking at five years with a possible extension if again, the new owner wants to keep the old owner around for whatever reason. It's really looking at again, the degree of involvement that owner has determines the amount of time almost in years that it's going to take to transition that out of their hands. The other things you also have to look for are what operating procedures do they have in place? Do they have systems and processes lined up that are followed regularly and employees understand them and they're constantly updated by the team?

[00:14:57.590] - Dan Paulson

We also have to look at are there any industry certifications or qualifications that they need to keep up to date on or they need to add that's going to make them more attractive to the new buyer? There's all these different factors that have to be put into play. If you're not ready to do that, that just takes more time and it takes more involvement of the owner at a time when they want less involvement in the business. Then there's also the other factor, which is never accounted for, which is when that owner retires, what are they going to do with themselves? Because if they don't find a way to channel that energy, they're going to end up getting re-engaged in the business they're trying to get out of and undo everything that basically we're doing to get them to the point where they can sell the company. Now, from the standpoint of all this, my first steps with this, again, are looking at how the business is run and talking with that owner and trying to figure out what things they're doing, what they're not, who's doing what, how involved are other employees? Do they have a line of succession in leadership that can step up to the plate and backfill those positions?

[00:16:16.660] - Dan Paulson

What power has been given to those people so far? Do they have a way to let go and let those people do their jobs? And then the other part of it is also, who do I have to hire? So once you start finding these gaps in the org structure, who else do you have to bring in and how long is it going to take to do that? In a lot of these positions, especially when you're talking about middle to upper management, they're not readily available. You're going to have to go looking for them. You might have to go take them from a competitor or from another resource to get those people in. We all know what a problem frontline workers are to get in the door. Well, now you're looking for somebody with maybe 15-20 years of experience. How easy is that person going to be to replace? From my perspective, I'm always looking at that structure, the culture, the systems and processes that they have in place. That's really where we start the work on determining timeline and what steps we need to take moving forward to get them ready to sell. How about you?

[00:17:20.380] - Rich Veltre

I think that if someone was to come to me today and say, I'm really thinking about selling, I would take a look at the last three years of financial results. I'd start there and then I would compare to giving myself a very rough estimate and get them to say, Well, here's what I think it's worth. Here's what I would want for it. Let's see how far apart those two numbers are. Then from that point, you can say, Well, if that's the number you really want, then here's how we have to go about getting to there. Let's see in the last three years numbers, what numbers are they that would keep you from getting the number that you want? That way you can start to work on it. So then if it takes the next two or three years of, here's your financial results, you're actually working towards a goal. That would be my starting point. Just let's look at if you were to sell it today, where would we wind up? You may not like what you see. You may love what you see. I couldn't tell you from the start, but by doing it that way, at least you're giving yourself that, if I have to make significant changes, I could get out of here in three years.

[00:18:28.460] - Rich Veltre

I could be retired and onto whatever new venture or new retirement, whatever it is you're trying to get to, you have some breathing room that you can make some changes and move forward and hopefully regain the ability to get the number you want.

[00:18:45.800] - Dan Paulson

And the key to that is the investment. You have to be willing to make the investment to separate yourself from the business. That's where we come in. And that's why we work well together, because as we both pointed out, you probably are going to need more personnel than you have right now because somebody's got to replace that owner. Often that is two or three positions, not one. There's a cost to that. Depending upon how big the company is and the talent you need to try to attract in, that cost can be pretty significant. You really have to look at what are you willing to invest back in the business to get the number you want versus, Am I going to sell this house with a bad foundation and accept the dollars I get for it? In most cases, the owners I talk would say, well, no, then you're going to have to put some money back into it, hoping that we can get a return on investment on what you're putting in to increase that value significantly.

[00:19:47.100] - Rich Veltre

100 %, you definitely have to be planning. And I think not just the dollars, I think you said it, but I think not just the dollars, it's the time. Give it that last push. Maybe you're tired and that's why you came up with the idea of I want to retire now or I want to get out. But give it the time and give it its due so that you can get back to the number that you really were thinking you were going to get when you do decide to list it as.

[00:20:12.060] - Dan Paulson

For sale. Exactly. So what's your takeaway from all this, Rich, as we wrap up here?

[00:20:17.760] - Rich Veltre

Start now, give yourself a three-year horizon. I think I had always said, start early, start early, start early. Think about it, at least let it rattle around your head, try to put something on paper. But I think that at minimum, count on it being a three-year time frame, you need to be able to look at that three-year time frame because that's what people are going to look for when they come in to examine your business and decide what it's worth. So take a look now, plan for three years, and let's rock and roll.

[00:20:49.300] - Dan Paulson

While you say three years, I'm going to stick to my five. I think from an operations standpoint, the caveat is how well is the business running without you being there? If the business is incapable of running without you, that's going to lengthen the time. We could get it down to three in many cases if there's some things in place, but the challenge always is how quickly can you step back and still have everything working as it should? That's a pretty hard thing to do. Well, Rich, this has been fun. We've got a couple more questions we'll be answering in the next couple of episodes. But really, it comes down to folks, when time is a factor, you need more time than less often, and you need to make sure that you're doing what you need to do to get that company ready to sell. So that's been it for Books in the biz. How do they get a hold of you, Rich?

[00:21:42.400] - Rich Veltre

TThe best way is by email with rveltre@veltregroup.com

[00:21:45.260] - Dan Paulson

 And you can get a hold of me at danpaulsonletsgo.com, You can watch more of these episodes. You can catch up on our future and our past ones if you go to booksnbiz.com. That is B-O-O-K-S, the letter N, B-I-Z. Com. And we will see you at the next episode. Talk to you later, Rich.

[00:22:04.940] - Rich Veltre

Take care, Dan.