After working for 17 years building a quality limousine business in Connecticut, Frank Mungel and his wife decided to sell their company and take an early retirement. When they looked for possible buyers, they were disappointed to find that there were not any ready to buy. And, after completing a business valuation, they felt discouraged about the true value of their business. The valuation report pointed out that value is based on the business’ ability to generate income, and had no bearing on how many years he and his wife had invested in the business.
Mungel looked within his company for a possible buyer, but decided that his present employees did not possess the entrepreneurial spirit or the skill he felt necessary to successfully manage the business.
Having no children to transfer the business to, Mungel was looking at liquidation as the only, and least attractive, way to leave his business.
By deciding this, Mungel has made one of the single most costly mistakes that a limousine business owner, or any other business owner, can make — not selecting a successor and preparing the business to be sold. Almost all small-business owners want to transfer their business to a family member, a partner or an employee. Only about five percent want to sell to a third party.
Unfortunately, who the owner initially has in mind, and who actually purchases the company are often different.
The real problem is most owners do not plan their exit, and consequently the transition is often out of their control. Often times only a third-party sale or liquidation is available to a limousine business owner.
This article will provide some information necessary to enable the limousine business owner to make deliberate, informed decisions about how he or she will exit the business. What are the advantages and disadvantages to each type of exit plan? Understanding your options, and knowing the pluses and minuses to each, should give you the ability to make one of the greatest decisions of your business career.
Transfer of Ownership to Your Children Bob Verdi, president of Bermuda Limousine International in New York, received the company from his father Dominic. Dominic transferred ownership to Bob in the early ’70s. Currently, Bob is transferring ownership to Peter, one of his twin sons. Bob Verdi’s business-transfer history is a unique case. Only about one- third of business owners desire for their children to take over the business, but only about one- third of those actually do.
You will most likely not be able to do what Bob Verdi has done. So you should prepare to convey your business to another type of buyer. If you would like to consider transferring your business to your children, you should, of course, consider some of the advantages and disadvantages.
Some advantages to taking this path are that it remains a family business. It provides income for children, you can decide when you want to quit working. Also you can sell the business for what you want. The disadvantages to this path might be increased family problems, the fact that your future income is dependent on your children’s performance and a loss of control.
The key to successfully transferring to your children is advanced, detailed planning and communications over several years prior to selling. Sell to Partners, Shareholders or Employees Partners and key employees often make the limousine business bearable given all the difficulties of running a business. However, they can often serve a greater value if they become the purchaser of the business.
For example, I am personally planning my retirement and exit plan from Charles Tenney & Associates by selling to a partner or key employee. I am in the process of finding a younger partner or a key employee that can learn the consulting business over the next several years. During this time the key person will learn our customers, our policies, procedures, operations, sales and marketing directly from me. At the same time I will learn the strengths and weaknesses of the employee, and we will have time to organize accordingly. Unfortunately, I will probably have to finance a major portion of my selling price. I might even have to fund the down payment over the next few years with my own money.
Some of the key advantages in using this path are that you will be able to structure the deal to meet your needs, and you might even work for the new owner until you decide to stop. On the down side, you may not be able to get any cash up front, and all your future earnings are dependent on how well the business does after you leave. However, the biggest risk of all is choosing the right partner to trust your retirement to.
Selling to a Third Party
This path gets more attention and publicity, but it is not always the best path for a retiring individual. Some third-party buyers view retirement sales as bargain-buying opportunities. Often the retiring owner has not prepared properly and is at the mercy of the buyer.
Like the two paths before, the great opportunity lies in early decision making as to which path is right for you, and allotting considerable time, energy, and expertise in preparation for an eventual transaction, on your terms.
Perhaps the major advantage of the third-party sale is cashing out. Because of the consolidation stories we all have heard about getting terms and stock, some operators feel that getting cashed out is not in the cards. Except for the true “mom-and-pop” operation, sellers of good businesses that are prepared for a sale should expect to receive most, if not all, of the selling price. However, there is always risk involved in any term deal. Retirement should not bring with it several years of worry and stress about your buyer performing on his note. I am not saying that a term transaction cannot be good; they can, and often the tax advantages are important. Again, proper preparation and positioning enables the seller to be in the driver’s seat, and gives them the ability to choose a sound term transaction.
A nice benefit of using a third-party transaction is that it eliminates the pressure of dealing with children fairly and equally. A third-party transaction can sometimes be better than historical data would indicate. The consolidation we are currently experiencing, or at least have been experiencing in the limousine industry, has enabled some limousine business owners to cash in for more than the normal price in a traditional market. However, most of the time owners who are trying to sell to third parties are anticipating too much from the sale. Usually the owner has received incorrect information from an uninformed CPA, or the owner has heard rumors about what someone else sold for.
In a third-party sale owners should not be surprised when the new owner brings changes to the business. Most buyers buy businesses thinking they can improve them with change. Your business will most likely not stay the same.
Risk is a major part of selling a business on terms. Most buyers will pay more for a business if the seller will finance a portion of the sales price. If the seller is not prepared and is at the mercy of the buyer, the financed portion of the business should be considered windfall. Prepare your business properly and don’t let this situation be a part of your exit activities.
John Logan has owned and operated a three-car limousine service in New York for 22 years. He had recently decided to sell his business and retire. His cars were old, he worked out of his home, and his primary source of revenue came from one faithful account. After examining the business, it became apparent that all John had to sell was a job with about $60,000 per year in expected personal income for a future buyer. Since John is the company, when you take John out of the equation, there was nothing left of value for a prospective buyer. John has no choice but to liquidate. He might find a buyer for his one asset, the primary account, if he is willing to sell it on terms; otherwise, the risk would be too high for any intelligent buyer.
When a business has no proven income-producing capability, often the only path to take is