By Steven Knight, creator of Solutions and Opportunities at Mosaic Home Services Ltd. — Building Canada’s Largest Home Improvement Franchise Network.
Ted and Linda started their painting company in 2000. Ted was a passionate 35-year-old painter with an eye for detail who was fast and efficient. Linda was an expert marketer and kept the books clean. Together they built themselves a great living. They made a family, bought a bigger home and lived the American dream. They made it.
Twenty years later, Ted is starting to slow down. Their painting business built a strong reputation and repeat client base. Over the years, Ted was reluctant to hire anyone else — no one could keep up with him and his expectations for a good paint job. For the past five years they’ve been turning work away, and they haven’t marketed their services at all.
Their business has provided well for them for years. Ted and Linda are debt-free. They’ve put two kids through college, and they’ve lived a wonderful life. They have some money put away, but not enough to retire. Ted has a few years left painting, but eventually, his body won’t let him keep going, and his clients will grow tired of waiting or being told they can’t receive his services.
This is the story of millions of entrepreneurs. They build great businesses and deliver outstanding services, but they don’t plan an exit, and now they’re stuck with a burden that used to be a cash cow.
So, what does Ted do?
Let’s say he wants to sell the business. After all, it’s a cash cow. It paid off a house and two tuitions and afforded him a very comfortable lifestyle. Blood, sweat and tears went into it for years. All that effort has to be worth something. The accountant says that the “retained earnings” are really strong — that money isn’t in the bank, of course, but someone out there has it, and it belongs to Ted.
The home-improvement and home-service market is full of people like Ted who believe their business is worth six or seven figures, and who can blame them? Often their entire life savings is tied up in the equity of the business, and without a successor to carry it on, very few options exist for these entrepreneurs. The sad reality is that Ted’s business isn’t sellable for a few key reasons:
• Without Ted and Linda operating it every day, it wouldn’t exist. Why would they sell their business if they still had to work in it every day, and who in their right mind would buy it?
• The customers don’t know the company; they know Ted. These business owners have built an incredible brand, but they are the brand, not the company itself. That is an aspect of their business that no one can buy.
• There is no one in the business who can fill Ted and Linda’s shoes. Sure, anyone could go out and find a hired gun to run the company, but with a business the size of Ted’s, the ROI on that kind of investment often isn’t worth the risk.
Ted and Linda find themselves in a dilemma that I’ve seen hundreds of entrepreneurs go through. They want to exit their business, but they can’t do so without it sinking without them, and they can’t get the price they want for it.
Luckily, there are a few solutions. Like most things in life, it all comes down to how much time and effort Ted and Linda are willing to put in to solve their dilemma.
Sell to a competitor.
Find the company that has been nipping at Ted’s heels or the company that Ted has been slightly lagging behind all these years. Sell them the business. Why?
• They see value in the customer base.
• Their learning curve is lower, making Ted and Linda’s exit simpler.
Find and train a successor.
The strategy here is to shift the value away from Ted personally and put it into the business. Teaching the tricks of the trade is long, arduous and risky, but it’s the most stable solution for long-term returns. Why?
• Even if this successor buys into the business, Ted can retain shares and a stake in future earning potential.
• Ted’s personal equity remains in the business, meaning it’s unlikely that customers will disappear overnight.
Find someone who is buying businesses in your industry
The world is full of opportunities — just ask, and you shall receive. Across the country, thousands of groups are buying businesses just like Ted and Linda’s because they understand the market and their dilemma. Why?
• These groups can help entrepreneurs phase out in a controlled way over a period of time, understanding the investment they will need to make to keep the business successful.
• These groups have the experience necessary to retain as much value as possible and are well known to their local network of business brokers. Simply typing “businesses for sale in city X” into Google will give you thousands of ideas.
Ted and Linda are honorable entrepreneurs, but they’ve fallen into the trap of building themselves a job instead of a sellable business. A lot can be done to help them, but nothing can bring back the time that’s been lost. Don’t make the same mistake — think about your business exit strategy early and often.