“I’m glad I’m not a doctor, I hate delivering bad news.” I said this to Larry (not his real name) as we met to discuss his interest in selling his business. I was about to deliver some bad news.
Larry had been in the business for 15 years. Though it was technically owned by his father, Larry was the main man in making things happen. But when it came time to make a decision about the future of the business, well, that was left to Dad. Though he was essentially retired, Larry’s 77-year old dad was not willing to let go. Unfortunately, Larry had grown weary of operating the business with little upside; he couldn’t get over the hurdle that keeps so many business owners from making any serious money. Larry thought it best to leave the company and take an opportunity that had landed in his lap (his brother-in-law’s company had a need for a sales managers and Larry was a perfect fit).
Being the good guy he is, Larry devised a plan to help his dad see that his leaving would be in his dad’s best interest. That plan included me providing an opinion of value so that when he told him he was leaving, Larry could tell him the upside he could enjoy on proceeds from the sale.
But therein was my problem, the business had little value without Larry. He had run it for most of those 15 years. The employees and customers relied on him; Larry was the glue. I had to break it to Larry that no buyer would see much value in the business without the glue.
I was assuming, instead of leaving, Larry would decide to buy the business, which might lead him to professionally and emotionally re-engage to find the personal satisfaction required to be a successful business owner. But I didn’t hear that, Larry was done, he was looking for a way out.
“So I have to tell my father that I am leaving and there is no value left in the business?” he asked. That’s when I made the comment being grateful I wasn’t a doctor. “There’s no good choice here,” I said to Larry, “either you stay and continue doing something you don’t want to do, or if your dad ever hopes to create a transferable business, he has to re-engage and find someone to replace you.”
Creating transferrable value is something most business owners don’t think about until they are ready to transfer value (i.e., sell). The value that was in the business, profits of about $450,000 per year, was directly attributable to Larry’s knowhow and customer relationships. To transfer that value on any kind of reasonable multiple, a buyer would want to be assured the business would remain stable after Larry is gone. In the absence of that assurance, no buyer would put his/her money at risk.
It grieves my heart to see a business owner ready to retire but unable to extract transferable value from the business. With just some pre-planning, this can be avoided.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee.
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