Bowing Out
Businesses are put on the market every day, but what motivates the owners to sell?

By Ellen Jensen

Dick and Don Krizman bought their business 47 years ago. Now, the brothers are selling Krizman’s Hair Salon because they’re ready to retire. Dick is, after all, 80 years old. Still, he hasn’t yet left completely. He still works for the new owner a couple of days a week, helping smooth the transition. He is ready for a little more relaxation, but after working in his business for nearly half a century, it’s tough to walk away.

The Krizmans’ reason for selling their business is one of the most common. Dan LoIacono, president of business brokerage service ABMI, said that about 60 percent of his clients are folks who want to retire. Still, there are nearly as many reasons for selling a business as there are for starting one. For some people, selling their business after pouring their heart, soul, energy and capital into it is like losing a family member. For others, the business was purely business—a means to an end. Whatever the reason, the decision to sell rarely is made lightly.

The Planners
Some people start a business as an investment, for the sole purpose of selling it down the road. Sally E. Smith decided to leave the banking world several years ago either to start or buy a business. She spent a year researching to find out what types of businesses had the best potential, but she already knew she wanted to build a business to sell it.

“I ended up starting something that had nothing to do with banking or anything else I had done,” Smith said. “But it was as close to a guarantee as you can get that it would be successful.”

She built a distribution business, Chops of Iowa, which shipped premium meats around the world à la Omaha Steaks. From that business sprung Iowa Gourmet Foods, which she and her partner formed to resell their distribution processes—direct marketing, database management, shipping, direct mail—to other companies.

The plan was to sell the businesses in five to seven years. Because her husband’s job brought him to Kansas City, they sold at the end of the fourth year, a little earlier than planned, but they were prepared nonetheless.

“We had been grooming the buyer from the first day, even though they didn’t know it,” Smith said.

Smith said they set out to “groom” large corporations with complementary or competitive businesses by developing them as clients and generally making themselves known in many corporate circles. By the time they were ready to sell, they had already received inquiries from corporations interested in their international distribution system.

Ray Pitman said he didn’t start his businesses with an exit strategy in mind, other than to sell them at some point. He sold RO Corporation to Simon Engineering, an English company, because the companies were compatible and the deal gave the company a worldwide presence.

“I also felt that since I was 65, it was the time to create a secure future for RO and its employees,” Pitman said.

Krizman had the same philosophy. He waited to sell until he found a buyer who would continue to operate the beauty salon.

“My help has been with me for 35 to 40 years, and I didn’t want to jeopardize their jobs,” Krizman said.

Sour Dreams
After she moved to Kansas City, Smith began researching her next venture, but entrepreneurs started calling her for help, and a consultancy was born. She had been around entrepreneurs her whole life and was familiar with businesses ailments.

She said the symptoms she sees are typical—slow sales, outdated products and lost enjoyment. In some cases, business owners start to doubt the dream will come true, Smith said. Sometimes, getting out of the business can be the answer.

“People think they are stuck with one way of solving a problem,” Smith said. “If the business is keeping you from the living you have dreamed of, selling is one way you can change that.”

Dan McDonough, his wife and brother sold their two Rocky Mountain Chocolate Factory franchises—one in Lawrence at the Riverfront Mall, then in the lobby of the Marriott SpringHill Suites and one in the Great Mall of the Great Plains in Olathe—because they were burned out. Personnel and location issues weighed them down, but on top of that, owning the franchises didn’t offer the lifestyle they dreamed of.

“We became self-employed to get out of the rat race, but we found we were in even more of a rat race,” McDonough said.

Rocky Mountain was run similar to a restaurant in that everything had to be fresh, he explained. They continually had to produce product, and waste was an issue. Because they couldn’t make anything in advance, the business became a daily grind. The malls dictated their hours, and they found that it was a seven-day-a-week, 363-day-a-year job.

“We were closed two days out of the year,” McDonough said. “We found over the years that the only way to be successful was if we were there.”

The Plateau
Sometimes owners sell because they reach a crossroads. They cannot grow the business to the next level alone, so they either can choose to bring on a partner or manager, or they can sell the business.

Often, the best way to get out of a business is to sell it to a competitor, a move that can be difficult for some entrepreneurs to swallow. Some competitors have the attitude that if you’re going out of business anyway, why should they pay anything, said Rick Dillon, co-founder of Dillon Schramm Associates. The competitors think they will get the customers anyway.

In reality, however, the competitor usually only will get a fraction of those customers, Dillon said. When a business closes, the customer base tends to scatter, unless there is some sort of passing of the torch.

“It’s the relationships that need to be transferred,” he said. “If the former owner is active in the transfer of the relationships, the new owner pays a percent for every dollar of revenue that they gain from the new customers. As long as the buyer doesn’t pay cash in advance, but pays for what’s transferred, the deal is good for everyone.”

Sometimes, the owner can work the deal so that his business is folded into another, as opposed to keeping it a stand-alone business.

Nine years after purchasing GS Metalcrafting, George Schuck sold the business to a competitor, Cherrytree Enterprises. Now he works for Cherrytree on the sales and marketing aspect of the business—the part he hadn’t been able to focus on when he was still going solo.

“I didn’t have enough time to commit to the growth of the organization,” Schuck said. “It reached a point where in order to grow the business, I needed to be out doing more marketing and selling. I didn’t have time to commit to that.”

Schuck solved that problem by selling to another custom fabricator. He said they still are in the process of integrating some of the GS Metalcrafting operations into Cherrytree. Primarily, the transition involves making sure the employees are familiar with the custom fabricated items that GS built, so they can continue to serve the needs of GS customers.

If the entrepreneur wants to continue to grow, but the business has reached its limit, it’s time to part ways.

During the late 1980s, Kelly Pruneau owned a couple of gift shops in two hotels. After four years, she had reached a plateau because she couldn’t market them outside of the hotel. She was at the mercy of how well the hotel marketed itself.

“I couldn’t add inventory because I couldn’t really add customers,” Pruneau said. “I couldn’t grow anymore, so I decided in early 1990 to sell.”

The Turnaround
Business owners tend to be emotional about their businesses, said Jean Zimmerman, president of JZ Company. She said it often is difficult to know whether they should put more money and time into a failing business on the hope that it can be salvaged, or just get out. Deciding to sell a business can be one of toughest decisions there is, especially if it’s a fairly new business.

“If they’re selling, usually that means they are left with few choices,” Zimmerman said. “It’s important to note that a lot of businesses never sell. The fact that somebody is ready to sell doesn’t mean it’s going to be sold.”

Business owners often have no idea how much their businesses are worth, LoIacono said.

“They want to sell for $1 million dollars, and we have to explain that the business might not be worth that much,” LoIacono said. “When they find out their business is only worth $600,000, they have to look for other options because they can’t retire on $600,000.”

Trying to sell a business can be a wakeup call in terms of revitalizing business owners, giving them another dose of energy, LoIacono said. For example, owners of a sandwich shop felt that the business wasn’t picking up as much as they wanted it to, so they put it on the market, he said. The owners continued to work the business out of necessity because it was their only income. It turned out that because of their continued efforts, the business started to take off, and they decided not to sell it after all.

Movin’ On
Some business owners sell simply because they are ready to move on to another opportunity.

Joel Schroeder bought Lulu and Mimi’s Housecleaners Supreme Incorporated so that he could stop traveling. He had been a seminar speaker and wanted off the road. He wanted to buy a business but didn’t have a lot of cash. The housecleaning business fit the bill. It allowed his kids to work in the company and gave him flexibility.

“But I found that more and more I was being drawn back to the ministry,” Schroeder said.
He had been a pastor for 14 years before taking the public speaking position. During the last year before selling the business, he began working part time at a church as a second pastor and decided that’s what he wanted to do.

Pat Weiler, owner of Kavanah Cards, bought the custom cards business a year ago from a woman who had worked for the National Collegiate Athletics Association. When the NCAA left Kansas City, she started her card company but later decided she wanted to return to athletics administration. She sold her business to go work for the University of New Hampshire.

Worn Out    
Marylou Bove-DeWald, co-founder of Goodman and Bove, a consulting business and turnaround specialist, said that another reason people sell is that they are tired. In some cases the business turns out to be more than the owners want to deal with and not what they expected it to be.

Pruneau sold another business, Scandia Down, after 13 years because she felt she wasn’t doing it justice anymore. She had purchased the bedding store, which featured goose down comforters, right before her hotel gift shops sold.

“My dad, who is a serial entrepreneur, always told me that you have to look out for the business because nobody else will,” Pruneau said.

She said the bedding store had taken on a life of its own and grown beyond her original goal. She had wanted a business that was bigger and more challenging than the “mom-and-pop” gift shops she had owned, but she also wanted to have a life with her family outside of the business. Over the years, in the excitement of implementing new ideas and offering new inventory, the business outgrew her goals.

“I still had fresh ideas, but I didn’t have the energy to see those ideas come to fruition,” Pruneau said.
 
Timing is Everything
“Some people have a sixth sense,” Bove-DeWald said. “They just have a feeling of when things are working and not; some people never do, and they probably never will. Some people have never opened a business textbook in their lives, but they have the ability to know when things are going well and what to do. They have good vision.”

Pitman is one of those with good vision. He merged one of his early companies, Pitman Manufacturing, with AB Chance Co. of Centralia, Mo., because his company needed additional capital to expand and keep pace with its rapid growth.

“We were profitable at that time but couldn’t make enough to pay the taxes and keep up with expansion requirements,” Pitman said.
Bove-DeWald said other people study and want to do everything by the book, but being successful is as much feeling the business as knowledge of business. Many people look but don’t see.

“It doesn’t matter how hard you work with some people, they aren’t going to get it,” she said.

She added that a lot of people don’t know what they want the business to do for them. They work and work and are only making $1 an hour but they don’t realize that, and they continue working because they don’t know what else to do. That’s when it may be time to sell.

Sometimes the idea of cashing out is exciting at first, LoIacono said. When it hits home that somebody is actually going to buy their business, owners may realize that running the business is really what they want to do. He said this was the case with the owner of a light manufacturing company.
“When the economy started bouncing back and the business picked up, all of a sudden, his business didn’t look so bad anymore,” LoIacono said.
In some situations, the business has done well for the owners and provided them a nice lifestyle, Bove-DeWald said. They’re not rich, but they’re not scrambling, either. Then, all of a sudden, they run aground. Once the business is on a certain path, it’s like a cruise ship; it takes two or three miles to turn it. If you don’t see early enough that you’re off course, you may never get back.

LoIacono agreed. He said if business owners were a little more proactive when making adjustments to marketing or the business model, they could counteract negative buying patterns and could shift and adjust to a changing marketplace.

He said once business owners get burned out and are ready to do something else, they may not be as sensitive to shifts in the market and may not put that extra flair in their business that helped them to get where they were. The value of the company can start to slip. Those are the cases in which owners hold on too long, LoIacono said.

Deciding to sell a business can be as agonizing as deciding to start one. But knowing when it’s time to exit, and planning for it, is an important part of the entrepreneurial lifecycle.


Exit Planning Roadmap
 
Dan LoIacono, president of ABMI-Business Brokerage Services, recommends these steps for business owners who are thinking of exiting their business.
 
Step 1: Set your exit objectives.
When do you want to retire?
What will it take—in cash—to generate the retirement income you need?

Step 2: Prepare financial statements and other business information.
 Buyers will want to look at financial statements for at least three years, a list of assets, contracts with vendors and other documentation related to the business.

Step 3: Consult your advisory board.
 - Assemble a team of advisors to assist you with planning. This team should include a CPA/accountant, tax advisor, attorney, estate planner, and business broker.
- Explore strategies to minimize the tax impact of the gain.

Step 4: Determine the value of your business.
- How much is your business worth today? Consider obtaining a third-party appraisal from a professional who specializes in business valuation.

Step 5: Develop a plan for the company to function with minimal owner involvement if needed.
- Unfortunately, many business owners build their business to function around the owner. If the owner is not actively involved, the business will no longer function. This creates challenges for a new buyer and reduces the marketability of the business.

Step 6: Fine tune the business.
- Put yourself in a potential buyer’s shoes. Make the business look appealing to a buyer by cleaning up the business as needed, both from a physical and a financial perspective.

Step 7: Select a business broker to market your business.
- Maximum market exposure handled in a professional and confidential manner is essential to capture the greatest value for your business. Your focus should remain on operating the business with minimal distractions. Engage a professional to market your business and keep your mind on your business.

Ellen Jensen is the managing editor of Kansas City Small Business Monthly magazine.