How Can You Sell a Business to a Buyer Who’s Broke?

According to a recent report from the Federal  Reserve Bank, over half (52%) of Americans could not pay for a $400 car repair without borrowing. We can assume that most of these folks would not be legitimate prospects to purchase your business, but what do your qualified prospects actually look like?

I use this space frequently to examine the impact of Boomer retirement, the transition of 60% of the privately held businesses in the US. If you are a regular reader, you’re at least passingly familiar with the demographic, psychographic and sociographic trends that combine to create a seismic shift in the small business landscape between now and 2025.

Overlapping birth charts(If you are not up to speed on this, download my free EBook collection of blogs, Beating the Boomer Bust. You will be shocked by the numbers.)

Another facet of the challenges facing Boomer business sellers is the lack of liquidity in the buyer population. It can’t be shrugged off as “Those kids just don’t save like we did.” As the Fed survey shows, the problem is deeper and wider than that.

Look at the change in household finances since most Boomers were starting out. The average debt for a newly minted college graduate today is $29,400. They’ve likely had multiple credit cards since they were eighteen. They were raised on a brainwashing media diet of instant gratification. Why should you go without something while you save to buy it, when you can buy it now? You have to budget the money anyway, sacrificing  by not enjoying a nice car or big-screen television while you pay for it seems stupid. Personal budgets are built around the ability to make payments.

On the other side of the transaction is a business that has been developed over decades. It has assets and cash flow. Not unreasonably, most Boomer owners expect at least a few hundred thousand dollars for the smallest business, and many are worth millions. How are these already-indebted buyers going to pay for a company when most can’t even muster a substantial down payment?

Yet, most small business owners still say the same things they’ve been saying for the last 20 years.  “When I sell my company, I’ll only accept all cash,” or  “I will never hold a note for my business.” That simply doesn’t jibe with reality. Buyers will expect financing. It is how they’ve purchased everything in their lives. If they don’t have sufficient net worth to attract a third party lender, the seller is the only remaining source.

The numbers don’t lie. Two-thirds of Boomer owners are 55 or older. The remaining third will reach that age by 2019. One alternative to competing with the throngs of sellers is to transfer your business on what is essentially a “layaway plan.” That method allows your buyer to work in the company while he or she purchases equity in small amounts, eventually building enough ownership to qualify for a third-party loan. It takes time and planning, but so does building a valuable entity in the first place.

Most of those who continue to wait for an individual with the financial resources for an all-cash sale are going to be disappointed.

Posted in Business Perspectives, Economic Trends, Exit Planning, Selling a business, Strategy and Planning | Tagged , , , , , , , , , | 3 Comments

3 Responses to How Can You Sell a Business to a Buyer Who’s Broke?

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  2. Neil Arthur says:

    can you identify the source of the chart stats? thanks, N

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Smart Metrics and Dumb Metrics

“We doubled our profit over this month last year!” When I visit a coaching client, that’s a pretty exciting opener. Of course I want to know how and why. Too often the answer is “Well, last year this month had three payrolls,” or “We had two more working days than last year.”

If you have to explain the circumstances of a measurement, it’s a dumb metric. “Manage what you measure” is a pointless axiom when the thing being measured isn’t consistent. If your results vary because of circumstances beyond your control, how can you manage them?

In my most recent book Hunting in a Farmer’s World, I discuss the problems created when we stick to a farming calendar created centuries ago. Few industries (other than agriculture) actually function according to a twelve month cycle, but most continue to measure their results that way.

In the hospitality industry, a thirteen month year makes far more sense. Business volume is higher on weekends, and having a consistent number of weekends (four) in each cycle simplifies comparisons. Other companies in manufacturing and distribution pay attention only to quarterly results, because 13 week periods are far more consistent than 19 to 22 day months, which vary depending only on when the first day falls.

In a cyclical industry, such as those related to capital goods, an even longer cycle makes sense. Comparing numbers over a rolling three or even five-year period permits better analysis of trends and market share.

Fractioned appleThe whole concept of Key Performance Indicators (KPIs) requires that you compare between like things. The availability of big data allows it to be easily confused with actionable information. If 12% of my customers purchase a side order of Brussels Sprouts, and 23% order a Tiramisu, what does that tell me? Nothing. If 12% order the sprouts and 40% want the French fries, I may have information on which to base my menu design.

Useful business ratios don’t begin with the numerator (how many, how much), but with the denominator (of what?). Profit dollars, number of orders and labor costs are pretty useless data by themselves for comparative purposes . Margin percentage, closings per lead, sales per day and output per hour are critical management information.

If you are still reviewing your monthly P&L by mentally adjusting each month’s variables, you are wasting precious time. A twelve month cycle is required by the IRS, but that doesn’t mean you need to run your business by it. Choose ratios and periods that allow real comparison. Only those are smart metrics.

Posted in Strategy and Planning | 2 Comments

2 Responses to Smart Metrics and Dumb Metrics

  1. >>A twelve month cycle is required by the IRS, but that doesn’t mean you need to run your business by it.<<

    While technically correct, IRS does allow 52/53 week years, which includes 13 – 4 week months!

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The Luxury of No Resources

Among the Baby Boomer business owners who are beginning to plan their retirement, there are millions who founded the companies they plan to sell. Many of these were technicians when they started. They began as employees, and then used their skills to start a small business.

When you are bootstrapping a new business, there really isn’t much opportunity to make big mistakes. You can’t afford it. The “luxury” of no resources can be described in two ways. You don’t dare take the risk of betting everything on one course of action (because a wrong decision kills the business) and you simply lack the wherewithal to try anything, no matter how enticing, in a really big way.

No MoneyFor most startups, that means the owner undergoes a process of trial and error through low-risk experiments.  Advertising is limited. Hiring is cautious. The first option for any new skill required by the company is usually the owner. He or she learns how to do everything in the business, because it’s too expensive to pay someone else to do it.

Of course, most small businesses fail in their first few years. The business school explanation is that they are “undercapitalized.” The practical translation is “They have no money.” They lack the resources to hire highly skilled employees, or for aggressive marketing. For many that shut down, “undercapitalization” means simply that the business failed to generate enough money to provide the founder with a living wage.

Owners with sufficient creativity, tenacity and vision make it and grow an enterprise. Their experience in low-cost, trial and error experimentation becomes part of their skill set.  “Good decisions come from experience; experience comes from bad decisions.”

Thus, many technicians grow gradually into the role of business owner. A few bad hires at low wages prepare them for better decisions when taking on more skilled, higher wage employees. They can oversee all aspects of the operation, because personal experience with sales, marketing, and accounting gives them a broader knowledge base than just the operational skills they started with.

For any subsequent owner, this “Trial by (small) fire” approach to learning the business isn’t feasible. A successful business has too many moving parts to permit a gradual, start-from-scratch approach to building an ownership skill set.

Whether a retirement strategy involves transition to employees, family, or a third party, the first step is documenting the owner’s knowledge base. Expecting new ownership to simply “know” what to do isn’t reasonable.

My 48 page eBook, Beating the Boomer Bust, How Baby Boomers Changed the Face of Small Business in America, and Why it isn’t Over Yet, is available as a free download here. The password is “Woodstock.”

Posted in Business Perspectives, Exit Planning, Selling a business, Strategy and Planning | Tagged , , , , , , , , , , , | 1 Comment

One Response to The Luxury of No Resources

  1. Pingback: The Luxury of No Resources | The ExitMap | Transition Planning for Business Owners and their Advisors

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Key Man Policies May Not Cover a Buy/Sell Agreement

Over the last few weeks, I’ve had a number of conversations with clients about key man insurance. Let me say at the outset that I don’t sell insurance, and have no financial stake in whether any client has coverage or not. The use of such policies, however, may not always fit their intended purpose, especially in smaller companies.

The most common intended purpose of a key man policy is to fund a buy/sell agreement. The benefit payment goes to the company, which in turn uses the proceeds to purchase ownership from the family or estate of the deceased. If it works that way, it’s an excellent planning tool for your family’s security, but there are a number of things that can get in the way.

To begin, the company probably needs the money. If they are scrambling to replace you in the business, partners may be reluctant to part with a cash windfall that can keep them going. In most cases, the insurance company’s responsibility ends when payment is made. The buy/sell is a separate agreement, and enforcing it may require legal action by the bereaved family. In the meantime, the cash is being used elsewhere.

Surprisingly, some policies are in place to buy out a sole owner. A company can’t own all of it’s own stock. Someone else has to have at least minimum ownership, since treasury stock (repurchased by the company) has no voting power. If the buy/sell was put in place for former partners, you may want to revisit both the shareholder agreement and the policy.

DominosFinally, there is the small matter of company debt. The absence of the principle credit guarantor (which applies to most majority owners) will trigger repayment clauses. Lenders are in the business of mitigating loan risk, and credit agreements likely give them first call on any available funds. Unless the company remains on a strong footing, with another guarantor who can step into the primary role, the insurance payout might not be available to either the heirs or the business.

There’s one additional area where the objectives of a key man policy and a buy/sell agreement may not meet. That is in long-term disability. Because most buy/sells lump repurchase terms for death and disability together, many owners forget that the insurance only pays in the first event, and has nothing to do with the second.

There are many approaches to obtaining coverage to secure your family’s financial well-being and/or the sustainability of your business. Although I’m an exit planner, that world of split premiums, whole and universal life, insurance trusts and other, far more arcane structures makes my head spin. All I can advise is if your current broker advertises “auto/home/life” he is not likely the kind of specialist you need. Find someone who is experienced in reviewing shareholder or partnership agreements, and who can tailor a product for your requirements.

Thanks to all the readers who responsed to last week’s survey on energy costs. Just under 69% said either “Falling energy prices are good for my business” or “rising energy prices are bad for my business.”  Of course, 14% said the opposite, which just proves my point.

Posted in Entrepreneurship, Exit Planning, Strategy and Planning | Tagged , , , , , , , , , | 6 Comments

6 Responses to Key Man Policies May Not Cover a Buy/Sell Agreement

  1. Frank Benzoni P.E. Retired says:


    Another “Wide Awake Article” – To be advised is to be prepares, and you continually do that.

    Always look forward to the next !!!

    Thank you


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  3. John,

    Agreement that key-man insurance policies should be separate from buy/sell – ownership agreements. Having lived through the unexpected loss of two employees, I would encourage small businesses to look beyond ownership when considering key man insurance as part of their disaster planning process.


  4. Mike says:

    Another type insurance to consider is whole life purchased using Section 79 Insurance.
    Allows the company to pay for the insurance ( deduction to the company) owner pays tax on only part of cost, however beneficiary is the stock holders estate ( or wife) .
    Company pays for policy , stockholder owns and benefits from it directly.
    Can tied funding this to some part of stock valve in the future.


    John- My 43 years in the life business has taken me into many areas of practice. The usual KEY MAN POLICY is usually designed for one purpose only.It is to cover the loss of a “Key Man” such as a top salesman that brings in more than 50% of the companies business or an engineer or project manager that a company could not operate or complete a job if they should die. Buy and Sell agreements are usually to cover owners , partnerships or corporations for death or long term disabilities to owners or stock share holders to keep the business from imploding or having to deal with non producing spouses or minor corporate owners.All these plans should be drawn up by a law firm that is experienced in Business Law! not Legal zoom! The last thing is making sure that the agreements are funded with the proper products to meet the contracts specifications in the B&S agreement. I would shy away from Sec 79 plans in funding these agreements and look at the latest IRS rulings on SEC 79 use in business insurance? Comments Welcome! RICH FREELAND CBC

    • John F. Dini says:

      Thanks Richard. I agree that key man policies should be used for critical employees as well. I know dozens of companies, however, where key man covers the owner, who does not function in a sales or client management role, and the owners’ belief is that the benefit will be used to purchase stock from their families. As to the applicable IRS codes, you illustrate my point that such instruments must be carefully constructed by a professional such as you.

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“Tis an Ill Wind…

…that blows nobody good.” That old sailor’s proverb, first recorded in 1543 and further popularized by Shakespeare in “Henry VI” in 1623, is as plain today in its meaning as it was almost 500 years ago. Anything that is bad for someone is probably good for someone else.

It’s especially true in business. The failure of a company is a terrible event for its owners, employees, vendors and customers, but clearly offers opportunity to its competitors. A hurricane is rightfully characterized as a disaster, but it may not be such for contractors or lumberyards. Droughts are bad for farmers and ranchers, but generally benefit beach resorts. The effects of Moore’s Law place ever-increasing margin pressure on vendors of computer equipment, but the rest of the business world benefits from enhanced productivity.

oil scaleEnergy costs are one of the most far reaching examples of this dichotomy. Oil prices (at 85% of their foreign exchange) have propped up the Russian economy, despite sanctions over Ukraine. If they fall too far, it may destabilize the situation in Eastern Europe much further. Despite that, thousands of businesses would celebrate the savings from decreased transportation and chemical costs.

Natural gas prices have recovered from their lows of early 2012, but remain far below the averages of the middle 2000′s. Producers frequently flare off the gas from oil wells, rather than try to take it to market. The gas producers want to convert LNG importation facilities for export, since prices are far higher in Europe. The chemical producers, enjoying cheap feedstock for plastics and fertilizer, want the plants left alone. Local governments on the Gulf Coast stand back, afraid of offending either large-employer base.

What effect do swings in energy prices have on your business? Please answer my one-question survey here. No respondent information is collected, and you can see the current results instantly.

Posted in Business Perspectives, Economic Trends, Strategy and Planning, Technology | Tagged , , , | 1 Comment

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  1. Pingback: “Tis an Ill Wind… | The ExitMap | Transition Planning for Business Owners and their Advisors

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