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Selling a Small Business – 5 Tips for Baby Boomers Approaching Retirement

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The Point: As a small business owner, you pour your blood, sweat, and tears into your business! The day-in/day-out challenges associated with leading a business as it’s owner are supposed to be offset by the “golden” years of selling it and retiring. As the largest demographic in our society, the Baby Boomers, approach their exit it appears as though the golden years are turning to rust before our very eyes! So, in this post we’ll explore selling a small business with 5 tips for Baby Boomers approaching retirement… Enjoy! (NOTE: While the focus of this article is on Baby Boomers, it can be applied to any small business owner looking to successfully exit!)

The Baby Boomers

Baby Boomers born between 1946 and 1964 represent an estimated 73 million people in our society (The second-largest age group after their children, the Millennials, born from 1982 to 2000). Baby Boomers represent 41% of small business owners or franchise owners (Second to Gen X’ers born between 1965 and 1980 at 44%).

This demographic rapidly approaching retirement age (generally thought of as age 62 – the age at which a person is expected or required to cease work and is usually the age at which they may be entitled to receive superannuation or other government benefits, like a state pension). As they achieve this milestone, few appear to be financially ready/able to successfully retire. The top two reasons being that (1) they were the first generation expected to establish for themselves self-retirement tools/savings as opposed to government provisions and (2) the economic recession from 2008 reducing significant savings (if any were established).

Baby Boomer Small Business Owners

Statistics reflect that almost 40% of Baby Boomer small business owners feel they don’t have the financial confidence to retire before they’re 65, let alone three years earlier at 62! What’s more, a recent study suggests a full 72% don’t even have an exit strategy. Exit strategies for small business owners typically consist of the following (in popularity order):

  1. Liquidation
  2. Liquidation Over Time
  3. Keep Your Business in the Family (i.e., Succession Planning)
  4. Sell Your Business to Managers and/or Employees (i.e., Employee Stock Ownership Planning – ESOP)
  5. Sell the Business in the Open Market (i.e., Mergers)
  6. Sell to Another Business (i.e., Acquisitions)
  7. The IPO (Initial Public Offering)

Tips for Baby Boomers Selling Their Small Business for Retirement

As an active acquirer of small businesses (You can view my firms Acquisition Criteria here: https://tipofthespearventures.com/acquisitions/), I’ve compiled the following five (5) strategies or tips for successfully selling the Baby Boomer owned small business. (Note: As a somewhat conservative investor, I caution against the “all-your-eggs-in-one-basket” mentality when it comes to selling your business ahead of retirement).

Tip #1 – Diversify Your Money

One of the biggest strategies I see small business owners do is hinge their entire retirement on the sale of their business. A better strategy consists of acting well before the sale. It is important that small business owners take money out of the business from a personal standpoint and invest those funds no less than three years prior to an anticipated sale. Typically, most businesses will provide the most recent years financial statements as part of the financial packet to prospective buyers. Statements that reflect anomalies are scrutinized, leading to a sale multiple (3-5x) that will be less than or undesirable.

Tip #2 – Financial Statement Cleaning

Along those lines, the organization’s financial statements are the foundation reviewed during acquisition due diligence when selling any business. Updating the core documents like profit and loss statements can make a big difference to anyone exploring the enterprise.

Updated balance sheets and tax returns for at least the last three fiscal years is crucial in projecting the best financial position possible. The goal being to make sure everything ties together, making sense to potential acquirers and being easy to understand.

Tip #3 – Removing Yourself from the Business

Do you have staffing that’s able to run the business after your exit? As an active Owner Investor (as opposed to Owner Operator) I typically look for organizations that have depth of staff that will allow the organization under new leadership to continue on without current ownership running the entity day-in/day-out. Easing the transition here means hiring employees that will stay as the face of your business when the ownership changes. This strategy allows small business owners to potentially increase the value of their business and the likelihood it will sell.

Tip #4 – Operational Documentation

Having an Operational Guide is important for every business to successfully operate/run. These Operational Guides are critical details for manufacturing, distribution and sales. This guide that is written down and documented makes it easier for the new buyer to pick-up where the old owner left off and drive the organization forward. They also make it easier/less stressful for those employees remaining with the business.

Tip #5 – Identify Legal Barriers

Identifying if the sale of your business is an Asset (when a buyer is interested in purchasing the operating assets of a business instead of stock shares) or Stock (shareholders of the target company receive shares in the acquiring company as payment, rather than cash) sale will ease the exit process. Removing any of the legal hurdles can make the road to a sale less difficult for acquisition. For example, one that we keep coming up against is the transfer of the lease (Landlords using the sale of the business as an opportunity to renegotiate leases and up the rent can be viewed as undesirable to potential buyers).

SUMMARY

In this post, we’ve explored selling a small business with 5 tips for Baby Boomers approaching retirement along with 5 tips. All of these strategies are desirable for potential acquirers. As such, Baby Boomers looking to sell their business should look to complete them to position their business as they look to exit into their golden years of retirement.

Sam Palazzolo

#Leadership #BloodSweatSpears

#acquisitions #acquisitionentrepreneurship #businessgrowthstrategy #businessmergersacquisitions #buyabusiness #buyingabusiness #buyside #entrepreneur #entrepreneurship #entrepreneurshipthroughacquisition #exitstrategies #mergers #mergerandacquisition #mergersacquisitionsdivestitures #privateequity #growingbusinesses #growthstrategies #mergers #mergersandacquisitions #newbusinessopportunities #searchfund #sellabusiness #CapitalAssetManagement #sellyourbusiness #smallbusiness #InvestmentBanking #PrivateEquity #PE

Is Happiness a Requirement for Success?

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Are you happy? Ask yourself right here/right now are you truly happy? It seems the world right now is not a very happy place. With a health pandemic raging on, long overdue protests taking place, and a world economy on the verge of collapsing the news headlines don’t share a lot to be happy about. It’s an unrealistic expectation for people to be happy all the time, even without the current happenings. So, it got us thinking here at the Tip of the Spear Ventures, is happiness a requirement for success? In this post we’ll explore the benefits of happiness and share two reasons why it’s not good to be happy all the time (Trust me… Research shows it’s not all it’s cracked up to be)… Enjoy!

Is Happiness a Requirement for Success?

Happiness Meet Ditch

Yesterday I had a Zoom meeting with a colleague (I’m sure you did too!) The meeting started off just like every other meeting I’ve ever participated in, but quickly took a hard left-turn straight into the ditch! After we initially exchanged pleasantries (“Good morning (Name)”… “Good morning Sam”) we breached the “How are things going?” moment. This is where the turn came in! My colleague expressed “I’m bitter, burned out, and besieged!” How do you respond to that? Truth be told, I’ve asked that question a thousand times, pre-pandemic/pre-protest and typically get the standard “I’m good, how are you?” response. But not this time! Was my colleague trying me on? Didn’t they really owe me the standard response so that we could get down to business? Why was I facing this derailing moment?

Positive Psychology and the Study of Happiness

Positive psychology is a field born roughly 25 years ago. Positive psychology is often mistaken of perpetuating a myth regarding happiness, inasmuch a good life is all about being happy. There have been a number of good works on the topic of happiness, including Shawn Achor’s “The Happiness Advantage,” Matthieu Ricard’s “Happiness: A Guide to Developing Life’s Most Important Skill,” and The Dalai Lama’s “The Art of Happiness: A Handbook for Living” (Even I’ve written on the topic in a post titled “The Leadership Challenge: Pollyannaish!”) But perhaps this happiness-focus is not exactly what it should be?

According to Martin Seligman, perhaps the most-often cited expert in the field of positive psychology, the study is meant to approach optimal human functioning at large, including the topic of happiness. Furthermore, it turns out that happiness might not be the best state to operate in for success (As a matter of fact, it isn’t!)

Success does not Require Happiness

In order to function optimally in our lives, we do not need to operate in a perpetual state of happiness all the time. So why would we not want to operate in such a state of bliss? Here are two (2) reasons:

Why are You Here? – Meaning and Happiness

The question is as old as time: “Why are you here?” or “What is your purpose?” Defining your meaning is difficult, after all it’s at the top of Maslow’s ‘Hierarchy of Needs’ for a reason. With this in mind, answering those questions is going to take some thought… Some real deep thought! The experiences, actions, and relationships that make your life worth living typically fall into the two camps of “hedonic” and “eudaimonic.” Hedonic life moments are all about pleasure (Seeing beauty, eating chocolate, and/or loving another). Eudaimonic life moments, on the other hand, are all about personal meaning and purpose (Upholding your personal values, finding ethical meaning expressed in what you do, and/or standing up for someone that can no longer stand). Most of the time, what is most meaningful isn’t the most pleasurable and vice versa.

Negativity Makes Life Better!

While happiness might be a preferred state, research shows that negative feelings can in fact be good for us! Anxiety and fear can protect us (think “fight or flight”), guilt can motivate us to make amends, and anger can help us increase focus on a problem at hand. While there’s a difference between feeling an emotion and acting out as a result of it, most are able to experience the negative emotion in life’s ups and downs with a goal of creating a healthy and manageable lifestyle.

SUMMARY

So, happiness as it turns out is not the sole requirement for success. While living a good life isn’t just about being happy, it also entails incorporating authenticity, pleasure, pain, happiness, sadness, love and conflict. If we were only happy all the time, we’d overlook opportunities to provide improvement to ourselves, those we lead, and the communities in which we serve.

Sam Palazzolo

Business Acquisitions – Initial Due Diligence Considerations

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I recently participated in a Business Acquisitions roundtable discussion. The roundtable was made up of acquisition entrepreneurs well known for their roles in company growth and market consolidation. As a result, these successes have afforded these entrepreneurs to live lives with considerably more independent lifestyles (especially for the more well-capitalized entrepreneurs present – perhaps a topic for another post). One of the topics discussed at the roundtable was from a participant’s question, “What considerations should I have when conducting due diligence during the business acquisitions process?” Often times, failed deals are the result of a lack of conducting thorough due diligence on key information items on the buyer’s part. The questions like those below in the areas of Seller, Market, Financials, Legal, Environment and Personnel are initial considerations that should not be overlooked:

About the Seller

Learning as much as possible about the seller’s motivation for exiting in order to provide important insight into what their exit target is. Questions to ask regarding seller due diligence include:

  • How was the business started?
  • Why is the business for sale?
  • Is the seller selling the entire entity or just the assets?
  • Is there a business plan in place?
  • What keeps the seller up at night?
  • If the seller is involved in the business: How much salary does the seller take (now/after acquisition)?  How much vacation (now/after acquisition)?

About the Market

A few questions about market due diligence:

  • What is the size of the market and what market share does the acquisition target hold?
  • To what level can the acquisition be grown to?
  • What are the biggest challenges to growth?
  • Who are the industry leaders (local/national/world)? Is the company considered a market leader in any aspect?
  • Does the product or service have a life cycle, or seasonality?
  • What would the business’ customers and competitors say this business does best?

About the Numbers

More than anything else, it is important to thoroughly understand the financial due diligence of the prospective business acquisition. To determine if the seller’s claims are supported by the figures, ask to review three to five years of history and future projections:

  • Sales
  • Revenues
  • Gross margin
  • Cost of Goods Sold (details)
  • Earnings before interest, taxes, depreciation and amortization (“EBITDA”)
  • Capital investments
  • Taxes
  • Accounts receivables
  • Accounts payable
  • Inventory

About Legal Issues

To avoid hidden surprises, it is important to dive into legal due diligence issues in the company, including:

  • Any possible future lawsuits (If so, due to what?)
  • Is the business location owned or leased (If leased, what are the terms?)
  • Is there proof all taxes have been paid?

About the Environment

Conducting environmental due diligence is a crucial initial step. Governmental guidelines can levy responsibility for environmental issues that existed prior to the current ownership. Find out about any hazardous materials/waste disposal or other environmental considerations that must be taken into consideration.

About the People

If purchasing more than just the physical assets of a company, a potential buyer should understand key personnel issues such as:

  • Who else (besides the seller) has equity ownership in the organization?
  • What employment agreements are in force (FTE/Contract)?
  • What role do other family members play in the business?
  • Who are the key people, what do they do and why?
  • Which key employees are most likely to leave if there is a sale, and why?
  • How well documented are the business processes?

Summary

Business acquisitions are a better way for entrepreneurs to go into business versus startups. However, with that said the business acquisitions market still is littered with deal casualties (Even with showing considerable upside versus startup entrepreneurship). Taking the time to conduct the proper due diligence is the key. Due diligence in the areas of Seller, Market, Financials, Legal, Environment and Personnel are initial considerations that should not be overlooked.

Sam Palazzolo

PS – My firm is actively pursuing business acquisitions of small businesses ($1-$10Million Annual Revenue). If this describes you/your business and you’d like to inquire about our business acquisitions process, email selections@tipofthespearventures.com.

Q&A with Tip of the Spear Ventures’ Sam Palazzolo

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‘We went from talking about sales acceleration and strategic plans to working in survival mode!’

Sam Palazzolo
Sam Palazzolo

I’ve been counseling businesses from the Fortune 500 to small businesses as a strategic partner for more than two decades. Believe me… I’ve seen my fair share of ups and downs! Perhaps that’s why I was recently interviewed to gather my thoughts on where we’re at as a business community and what we must do in order to recover successfully. Here is a transcript from that interview… Enjoy!

Interviewer: How would you describe the current recession… How does it compare to 2008?

Sam Palazzolo: I remember well the great recession of 2008. I had just left a successful corporate career at Toyota, including working retail running a few large franchises. I had just launched my second company when the recession hit (Good timing, right?) What we are seeing now is a similar pattern, albeit greatly accelerated. The difference between is that was a financial meltdown… This is a medical pandemic induced recession.

After successfully exiting a startup I was leading, I formed my current company (Tip of the Spear Ventures) in 2012. Part of my job is providing business advisory services to a host of clients. The advisory services focus on three (3) specialties as subject matter experts (SMEs):

  1. Sales / Business Development
  2. Mergers & Acquisitions
  3. Business Turnarounds

Interviewer: Set the stage for us… How were things going before all this happened?

Sam Palazzolo: I had been on pace to travel this year for 40+ weeks, down from my typical 48 weeks annually. The clients I visited were actively seeking help with their businesses, primarily in architecting Strategic Plans and Sales / Business Development blue prints until it all blew up and the phone calls started.

Interviewer: What hit first?

Sam Palazzolo: At the same time the order came to shut down and stay home, there was also a request to identify what to do now? So we were working right away with business owners early on.

Interviewer: How did your job change through all this?

Sam Palazzolo: I spent the majority of my days answering phone calls, texts and emails. We pulled together some intellectual property regarding the pandemic, and specifically what to do about it as a business leader. Based on our research, we compiled and presented webinars… Lots of webinars! To date, and we just calculated this figure at the end of May, we had completed roughly 70 webinars.

Interviewer: What were the webinars about?

Sam Palazzolo: We took a two-pronged approach. The first focus was on business survival — what can businesses do to preserve cash runway, raise funds, adjust sales forecasts, consider appropriate marketing, implement headcount strategies, and control capital spending.

These played themselves out in webinars on leadership, working remotely, virtual sales techniques, serving the customer virtually, and more. At the end of each webinar, we always make a point of polling participants for what additional topics they’d like to see researched/presented. This has fueled future session development on all too timely topics.

Interviewer: What kinds of issues have you encountered along the way?

Sam Palazzolo: Like everyone else, we’re working remotely. This poses several challenges, namely ensuring that you have the proper home office setup (Best internet bandwidth available, phone connections, etc.) You can count on the unexpected occurring! The big question is how will you overcome these technology challenges and make sure you receive forgiveness from participants.

Interviewer: What other issues are business leaders dealing with?

Sam Palazzolo: The top issues are reduction in income and sales, of course. Businesses were closed by direct order of the government, considering some essential and the vast majority non-essential. That’s what makes this unique. Usually a downturn in the economy takes a little time to develop, giving business leaders time to prepare. But this was on a huge scale, all at once. Roughly 15% felt as though they were thoroughly prepared to face the oncoming pandemic… Only 15%!

Interviewer: What’s the scenario in a normal recession?

Sam Palazzolo: Typically, if you think about an economic wave, the crest of the economic wave, things are going well and then something happens that starts a decline and the economy contracts. Normally that takes weeks or months to play out. Then you hit the bottom of the recession, the trough, that can last 16 to 18 months and the recovery begins, eventually leading back to prosperity. What makes this so unique is the sudden drop-off to a recession. As I mentioned previously, this is a medical pandemic NOT a financial pandemic. Regardless though, in a matter of days things began to plummet putting an immediate hardship on all businesses.

Interviewer: So, if everything reopens, is there a shortcut to the recovery phase?

Sam Palazzolo: Some believed early on that it could return to normal as quickly as it came upon us. A lot of it depends on how this plays out with the virus itself. People are now understanding it’s going to be with us for a while, which means a new normalcy, new health and safety standards across the board. It’s going to change a number of existing business models. People at this stage are doing a lot of hypotheticals about how requirements will affect business. The customer base, the employees, the supply chain.

Interviewer: Where are we now?

Sam Palazzolo: We’re in the pre-recovery period right now. We’re still assessing new information from the state and regulatory agencies on how to reopen. A number of businesses are weighing their options — is it worth continuing or just shut the thing down and move on. That’s a tough, stressful period for business owners and families. Our acquisitions business has helped identify a positive recovery path. Keep in mind, in any downturn in the economy you’ll see some businesses end up closing. Those businesses who do survive are often in a much better place. The reason being, former competitors are gone, creating an opportunity to grow. Others find new opportunities. It’s a cycle.

Interviewer: What is happening now with your clients?

Sam Palazzolo: We went from talking about sales acceleration and strategic plans to working in survival mode!

How to Embrace the Power of ‘Yes’ in Business Turbulent Times

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The Point: These are truly turbulent times in business for leadership. Make the right moves, and you’ll be a hero! Make the wrong or no moves, and you’ll be far from a hero!! I’ve seen a lot of negative-speak lately as COVID-19 takes an enhanced grip on the globe. Recognizing that it’s awfully difficult to agree to deals that no longer make sense (especially when your business hair is on fire!), it made me wonder if we’re looking at the business-landscape through too negative a lens? So in this post, we’ll explore how to embrace the power of ‘Yes’ in business turbulent times… Enjoy!

How to Embrace the Power of Yes’

Starting with ‘No’

“I loved saying ‘No’ when times were good… I cherish the opportunity now that times are bad to say it with even more conviction/volume!” a purchasing manager at a client recently shared with me. If they’re like most purchasing managers or leaders I’ve worked with, during negotiation they’ve learned the single best tactic towards achieving a successful outcome for themselves/their company is to begin with ‘No.’ While embracing the power of ‘No’ typically leads to continued negotiations, and hopefully positive (or ‘Yes’) results for both parties, the possibility exists for negotiations to breakdown, stall or worst case scenario come to a screeching halt.

So, what are the effects of starting negotiations with ‘No?’ From Harvard Business School and Harvard’s Department of Psychology, research has been conducted and summarized on how the utilization of ‘No’ not only leads to poor negotiation traction, but often times the negative feelings associated with future negotiations. Furthermore, negotiations that start with ‘No’ typically break down, as participants perceive the inflexibility of the other party.

Starting with ‘Yes’

In business turbulent times such as these, the last thing I would recommend to a client is to take a bad business deal. As a matter of fact, I don’t think even in non-turbulent times taking a bad deal in and of itself is a good option! However, is there a way in which we can successfully not start with ‘No’ during negotiations? What would be the outcome in starting with ‘Yes’ instead?

Starting with ‘Yes’ overcomes the initial negativity often experienced during a negotiation. The inevitable “I should have started higher” thought permeates the negotiators mindset. However, this can not only lead to earlier agreements, shortened sales-cycles, but also better outcomes for both parties now (as well as in the future!)

‘And” is Better Than ‘But’

So how can starting with ‘Yes’ be better in negotiations than starting with ‘No?’ The key, according to a mediation expert, is to utilize the conjunction ‘And’ instead of ‘But’ in negotiation moments. Supported by the Harvard research, this technique often “[O]pens a window of opportunity for addressing multiple issues, and using new approaches, while mitigating the taint of pejorative shadings [leaves both parties].” ‘And’ also avoids the dismissive nature associated with using ‘But’ during negotiations.

Starting with ‘Yes’ using ‘And’ Example

Here’s an example of how to properly utilize ‘Yes’ as well as ‘And’ in a typical negotiation. For framing purposes, your company is being pitched a new software piece that will significantly reduce costs and increase utilization (Yes, this is possible!) However, it’s your birthday and the strategic partner calling on your company knows it… So, they inquire:

SP “I heard it’s your birthday today?”

YOU “Yes, that’s correct, and I’d love a cup of coffee and a doughnut.”

SP “Well then let’s go get one!”

Admittedly, this is not the greatest negotiation example (after all, who wouldn’t like a doughnut, and do we really need to wait until it’s your birthday to have one?!?) But the point I’m making is that if we had started with ‘No’ and utilized ‘But” in the response we’d be looking at a negative negotiation with the potential of stalling/stopping and having caused future negotiation to not occur (All future negotiations!)

SUMMARY

In this post we’ve explored how to embrace the power of ‘Yes’ in business turbulent times such as these. We explored the Harvard research surrounding the negativity of ‘No’ as well as how to positively leverage ‘Yes’ for successful negotiation outcomes. The key in utilizing, and especially in starting with ‘Yes’ is to use the conjunction ‘And’ to stipulate what you’d like to see have happen as a result of beginning, and staying, at ‘Yes.’

Sam Palazzolo