Selling a custom installation business is tough, especially when you are an integral part of the company. You are right to see the sale for what it is: a way for you to draw a salary while in retirement. But where does your retirement salary come from?
As the lead salesperson, you create value, and the company compensates you. But when you leave, the new owner is forced to replace you, either by doing the sales himself or hiring another. In either case, you will be replaced by someone else drawing a salary.
So where will your money come from? In most cases, the new owner is willing to trade his own immediate income for equity. So he will be sharing his salary with you for the next five years to buy you out. In addition, the new owner will most likely fill your absence with a lower priced employee, hoping to save a few dollars. You will get these dollars, too.
So heres the rub. Im sure you wont charge too little for the company, so lets look at what happens if you charge too much. This means that your new owner is forced to cut back on staff (bad) or share a bigger chunk of his take home pay (bad for motivation) or make decisions that are ultimately bad for the longevity of the company just to satisfy your monthly draw. The company might not last five years under these circumstances, and you will be shaken out of retirement.
If you cant see the future, then dont assume the risk. Risk can be seen as some factor that you apply to present earnings when you cant be sure of future events. The more uncertain you are, the larger the risk, and subsequently, the larger the risk factor.
If you knew beyond a shadow of a doubt that the new owner was guaranteed steady sales and income for the next five years, then you could comfortably determine a value for the business, plus set a reasonable payment schedule. But because you dont know what the future bringsespecially without your selling skillsthe risk is increased, and you should want a premium for that. Dont play that game, because the risk premium is so high and will surely cause financial strain to the business. Instead, do a little planning right now, and you can get a fair price for the business, while reducing risk to a manageable level.
Dont sell your business today. You cant just wake up and decide to sell a CI business. Youve got to align your managerial and financial structures now for the eventual sale.
First, make sure the company can run without you. Go to Belize for a month, and see what happens. Ahh. Belize. The warm water. The wooly monkeys. The snapping turtles. While youre there, your employees will make all the day-to-day decisions. When you get back, youll be well rested, tan and ready to assess the damage done.
Now take three months to fix the little problems that arose, and jet off to Bimini for a few weeks. Ahh. Bimini. Come home, see how the company survived and repeat.
See? This is a nice form of semi-retirement. You get to hang with the snapping turtles, plus take your full salary and your staff learns to live without the superbly tanned you.
Do this for two years, slowly removing yourself from the day-to-day and adjusting your salary to compensate for any changes your company encounters. In no time you will see how much your company can afford to pay you in your absence. And guess what? No one will begrudge your vacation time. In fact, they might enjoy the freedom.
If all goes well, you can approach your employee and cut a deal. Tell him that you want to work part-time (maybe one week a month) for the next year or so, and that you would like him to take over control and eventually assume ownership of the company. You make all the necessary adjustments to staffing, and you control your draw. Hear that? You control it. You set the staffing levels. You know how much the company can pay you.
And when you are ready to sell, make your buyer come up with some cash. Real hard cash. Id recommend a number equal to at least half of his yearly income. Thats enough money to make him think. That down payment is good-faith money, and you will agree to finance the rest. At what price? Well, somewhere around the amount of money that you have been taking for the last year. Because you know that its fair, you can set the length of the payout to coincide with your thoughts on what the company is worth today. This should be a plan with which you can both be comfortable.
Interested in having your CI business questions addressed in this column? Send them to Ira@BayAudio.com. Please include your full name, company name, and address.