Starting a business is hard. Finding the right product and market are only the beginning. Customer service, employees, accounting and planning all take time. Who has time to think about an exit strategy when you are occupied with growing your business?
Yet one of the most important events in the lifecycle of your business is selling. Selling is a large part of the profits your business will ever provide you. And most of this gain is taxed at a lower rate (long-term capital gains) than ordinary income. Just walking away is the worst choice.
Too many business owners push off planning their exit. They want to stay at their post until they are too old to stand at said post. It is a sure recipe for leaving clients/customers hanging; it leaves valued employees without a clear future.
All too often business owners consider selling their business as an all-or-none proposition. There is a better way. You can slow sell your business. Slow-selling can increase your selling price by more than 50%. You also get to stay involved in the business you built if you want. And if your health takes a turn south you have a plan in place that protects clients/customers and employees alike.
Methods of Slow Selling Your Business
Every business is different. Slow selling is not a simple one-size-fits-all template. A manufacturing company will slow sell differently than a service business. Plus, there is more than one way to slow-sell. The owner’s preferences will play a role in how a business is slow-sold.
The best way to understand the slow selling of your business is with an example. We will use my tax practice as our example for slow-selling. The important thing to remember is that slow-selling is very flexible. The seller enjoys the options of picking and choosing what fits the owner’s lifestyle and desires best.
It should also be noted that the size of the business does not matter when it comes to slow-selling. Big businesses slow-sell all the time. It is part of their business strategy.
Small businesses often sell 100% or let their business die a slow death as they spend less and less time on their business. Small business owners are unaware of how they can slow-sell to maximize their selling price while remaining involved in the business at any desired level for as long as they want. You can actually have your cake and eat it too when you slow sell. Even side hustles can enjoy the benefits of slow-selling.
Meet Our Slow-Sell Business
There are three reasons I am using my tax practice as our slow-sell business example.
- My accounting practice easily covers both methods of the slow-selling.
- It is a typical small business built over the owner’s working career and addresses many of the concerns owners have when selling.
- I am very familiar with each slow-selling activity as I have am actually in the process of slow-selling my practice.
My tax practice started in 1982 as a very part-time business. I had fewer than 50 clients and all the tax returns I prepared were very simple. People I knew needed their tax return prepared and I made a quick few quid for the effort. You can even say I slow-built my business.
In 1989 it hit me I could do this full-time and make a good living for my efforts. Plus! Tax season is only three months per year. Little did I know the workload would extend all year round.
My tiny practice grew quickly once I went full-time. I tripled the number of clients the first full-time year and then nearly tripled it again the following year.
Certain things bothered me in my practice. Computers cost exactly the same whether I used them three month each year or all year. Because of this I added payroll, bookkeeping, consulting, and publishing/training. That meant more employees.
By the time I was in business a decade over 2,000 clients graced my office. Tax returns were often much more complex at this stage. During tax season I had 16-18 employees; 5 during the off-tax season.
It was at this time I started to feel burnout. I didn’t want to sell and walk away with only a check to show for it. This is when the process of slow-selling began.
Slow-Selling Method #1
This is the method I am using in my practice. Method #2 below offers a completely different way of slow-selling.
Twenty years ago business was booming. I hired many employees and my building and office equipment were efficiently used. Maximum value was gained by using business assets for more than just tax season.
About this time I started to feel the strain of running a modest sized practice. I could always bring on a partner, something very common in the tax and accounting industry. But, that did not appeal to me.
My practice was made up of several departments: payroll, bookkeeping, consulting, publishing, and tax.
Payroll was the worst. Large payroll processors have an economy of scale I would never match. Margins were low.
The good news is that the two biggest payroll processors in the country, ADP and Paychex, are willing to buy the payroll book from accounting offices.
Paychex made an offer I could not refuse, so my payroll accounts went to Paychex. The best part for my clients is that I stayed involved in the process. This was not a sell them and forget them process. Remember, clients do not like to be sold. Therefore, you are partnering with another firm.
When clients need help determining reasonable compensation I was there for them. All that changed was that Paychex handled the busy work involved with payroll. I did the value-added part.
A few clients had issues with Paychex so I started working with ADP. ADP has a partner program for accounting firms. This allows referring accountants to receive compensation for referring clients to ADP for payroll and related services.
A few more years went by. As bookkeepers retired I built a relationship with a local bookkeeping firm instead of hiring more people. I get a one-time fee for a referral, based upon how much revenue the new client brings the bookkeeping firm.
By this point my practice had come full-circle. I started as a tax practice and was again a tax practice with some consulting (tax and business) and publishing (this blog and articles for other publishers).
My clients get the best of both worlds. I still oversee the bookkeeping if any issues arise. Plus, they get a bookkeeping firm dedicated to that one task.
Of course, I am still a tax practice. My head count dropped from 2,000 and a bit to a tad below 400 this year. I take no new clients and haven’t for years. But! I did build relationships with other tax professionals so all clients get served. A local firm takes some of the new tax clients and for those willing to allow a firm outside my area to handle the actual work I refer out.
If all goes to plan, my practice will continue the slow decline for another decade. What started as a side hustle in 1982, when I was 18, will sunset somewhere around my young 70s. The goal is to never completely get out because I love my work and really love my clients. The only way I step 100% out is if my health gives out or my mental abilities decline.
Slow-Selling Manufacturing Businesses
Service-based business can sell certain services in the slow-sell process. The way I sold payroll and bookkeeping is an easy way to see the slow-sell in process. Partnering with other firms allowed clients to slowly shift to the new firms while maintaining a professional relationship with me.
Manufacturing businesses have additional ways to slow-sell. Instead of actually selling a part of the company, work can be outsourced. Maybe all lathe work can be sent elsewhere. Or better yet, help your lathe employees set up shop. They get a built-in client list from you and they will already have equipment and support (from you). If the new business stays at your facility, clients may not even know new owners handle part of their work.
The whole point to the slow-sell Method #1 is that parts of the company get sold versus a complete sale of the company. The parts sell for more than the whole because there are no unwanted parts the buyer needs to deal with.
Strategic partnerships with other firms goes a long way in transitioning clients without clients feeling like they have been sold. Clients and employees have clarity. This allows continued relationships within the part of the business sold and with clients. Clients tend to jump ship when a business is sold. When the transition is smooth and employees remain in place, clients feels as if there was only a slight change in the way business is done. Everyone gets treated with respect. And clients stay.
Slow-Selling Method #2
Sometimes you don’t want to piece out a business. Sometimes Method #1 is not the best. As a writer, how would I sell the pieces of my publishing? There are possibilities, but it does not lend well. Outside publishers want material from me. Even readers here on this blog want to hear from me. Guest posts do not work well in the environment I created.
Slow-selling Method #2 is designed to keep the company together while maintaining continuity.
Under Method #2 you will need an entity structure (LLC or corporation). Once you read this article you can then check with your attorney to verify state laws are all addressed. Each state is different. Method #2 requires an attorney for handling the transfer process.
Method #2 does not actually involve selling whole parts of the business. Instead, a certain percentage of the entire business is sold to a new partner over a period of time. This allows the new partner time to learn the business while you still retain control. The amount necessary to buy requires less cash and/or borrowing since smaller portions are sold each year. As the buyer is able, more ownership can be transferred.
If a business owner wants to sell to a family member, Method #2 is the best route. Of course, you can do a complete sale to a family member with a seller-financed loan. Or, you can do it in pieces.
Two example:
I have a client in New Hampshire that sold his business to his two adult children. They worked in the business for years so they knew how to run the business. Dad wanted to sell and sold 100%, but provided seller financing. Dad kept a few small pieces of income that was winding down while the children picked up where dad left off with the main business. It was a seamless fit. Dad gets an income stream while the children get a profitable business with the best advisor (dad), should they need one.
The second example involves real estate. A local client owns a large amount of income property. Mom and dad (the owners) wanted to sell some, but not all, of their properties to their son. They also wanted to gift some to their equity.
What they did was visit their attorney to handle the transfer paperwork and other legal work. Each year for several years mom and dad gifted up to the gift tax exclusion limit. We were able to micromanage the exact amount transferred each year.
The parents wanted to retain a majority and wanted their son to get a step-up in basis on a majority of the property when they died. The son owns different percentages, all non-majority interests, in each of the multi-unit residential buildings. And! The son gets his portion of the profit. This allowed mom and dad a good income stream while the son got income for his work on the properties.
The parents could have sold one property at a time or sold a single property to their son. But by using Method #2, they were able to keep the entire business intact while slowly selling to a new partner. As an added bonus, the transfer was not a taxable event for mom and dad.
It should be noted that the partner does not need to be a family member. The new partner in this case will eventually own the whole business. You stay involved, making sure your business is maintained. Nothing is more common than a seller-financed deal going back to the seller for nonpayment and the business deteriorated.
Final Notes
Selling a business is not an all-or-none proposition. Selling pieces of the business, building relationships with other businesses, outsourcing, or bringing on a partner that slowly buys the business are viable alternatives.
These slow-sell methods allow for the highest selling price because the buyer has a better chance the business will continue with its current client base with possibilities for growth.
Even better, clients never feel like they have been sold. Clients and owners, including new owners, are slowly brought together so everyone gets acclimated. Everyone wins. And you get to enjoy seeing your lifelong work continue after you take that well-deserved retirement.
