Mark: Today on PowerTips unscripted. We talked to Pete McDowell, senior consultant for Remodelers Advantage. What’s your end game? You should be thinking about it. There are four primary options for you to exit your business. Pete’s here to discuss these options and give valuable insights into the process and we’ll hear all about it in just a minute.

Victoria: Hi, I’m Victoria Downing and welcome to PowerTips. Unscripted, where we talk about tips, tactics and techniques to help you build a strong, profitable remodeling company. And I’m here with my co-host, Mark Harari.

Mark: Good morning.

Victoria: How are.

Mark: You? Pretty good. How are.

Victoria: You? I’m great. As they say, take each day with an optimism that challenges all rivals or something like that.

Mark: That doesn’t sound real. It doesn’t add up.

Victoria: Well, no, I actually I borrowed I paraphrased badly something from coach Jim Harbaugh. I think it was.

Mark: So I got it.

Victoria: So we’ll see. Anyway.

Pete: Sweater vest guy.

Victoria: Yes. I’m looking forward to this session, Mark, because I think a lot of people would love to be able to sell their business when they are ready to move on to other things.

Mark: Well, seller just tags it in general. But yeah, sometimes you just got to move on, right?

Victoria: Right. You know, it gets to be that time for everybody at some point in time. That’s true. So I’m looking forward. I think this session will answer a lot of questions for people.

Mark: Let’s do it.

Victoria: All right. So today we have with us Pete McDowell. He and his business partner, Peg Burley, have just joined us as consultants. But remodelers have bench. And I’m super excited about the fact they’re joining us. Pete and Peg help people evaluate each of the of the options for moving on from your company and select the best path, among other things.

Victoria: Along the way, they assist their clients to work less and build the value of their business. In that way, you can enjoy life now and look forward to a comfortable next chapter. So welcome, Pete.

Pete: Thank you, Victoria and Mark. It’s good to be with you guys.

Victoria: Yeah, it was great having you at the summit this year.

Pete: It was a great event. Very nice.

Victoria: Cool people, aren’t they? Our community?

Pete: Yeah, And great speakers, too.

Victoria: Yes, absolutely. So let’s talk a little bit about transfer of ownership.

Pete: Sure.

Victoria: So there’s like four main ways. Tell me about it.

Pete: Yeah. So primary ways. And of course, there’s a fear that we don’t recommend the we actually had a client. Think about doing a few years ago in Dallas, Texas, we had this very profitable business. And his first comment to us was, well, I’m just going to shut it down and walk away. And after we did a little math with him and he realized that he’d probably lose out on 3 to 5 million, Goofy decided not to do that.

Pete: So we continue to help him grow it. And now he’s in the midst of working with the final stages of selling it to a third party. Nice. Think the way is to just shut it down and walk away. We we’re not a big fan of that. So the four primary things that people could evaluate is to number one is to transfer it to family members.

Pete: And with some of these smaller businesses across the country, the small businesses in this country are about 70% of the commerce. And a lot of them are owned by one or more family members. And that is an option. It has upside and downside. But that’s that’s one option. A second option is the third party route. You could sell somebody you don’t know through broker or not.

Pete: You can advertise if you’re in a bigger city. There are a lot of different ways that you can transfer a business and find an appropriate buyer, and they may or may not be technical experts in your business, but if they are, they will have a different outlook on it than somebody that doesn’t understand your business. But if it’s profitable and growing, it could be somebody that doesn’t know anything about your business and might be willing to pay what it’s worth.

Pete: The the third option is to sell it or transfer. And Peg and I have done several of these with other some of our clients is to help them transfer it to one or more employees that currently work for the business.

Victoria: Okay.

Pete: There are some there are some good ways to do that. And and then the last way and this is for somewhat bigger businesses, you really need to hit a fairly substantial profit threshold to be able to do it. ESOP, an employee stock ownership plan. And that’s something that the federal government did for providing some pretty good tax advantages.

Pete: So if you have a large enough business, that’s a great option and you can save a lot on your tax bill when you do make the transfer.

Victoria: Okay. So let’s go through each of these in turn, right? The first one was transfer or sell or leave to a family member. What have you seen and what are you recommend? If that’s an option? I mean, a lot we’re having a lot of our roundtable members that may have left for one reason or another, come back with their kids in tow to learn how to be leaders of their companies.

Pete: Yeah. Yeah. Well, one thing I want to say about all four of these is that if you’re thinking, let’s just say you’re 45 years old and you’re in your business and you’re making money and you love what you do, we would we always tell our clients 8 to 10 years out, start thinking about when you might want to exit.

Pete: Don’t start thinking about a year ahead. Right. If you can, that will work. But you’re going to leave a lot of money on the table. If you start early, you’re going to be you’re going to have a much more valuable asset to transfer.

Victoria: So. Okay. Okay.

Pete: And that applies in every case. And so family members one is when you have multiple children, that can get complicated. Right? So this is part of the House side. You’ve got to let’s say you have three kids. I have three children, three adult children. Let’s say two of them are interested in the business or one is not. Well, how do I make sure that Thanksgiving dinner is an awkward because I gave the business to two of the kids.

Pete: And what happens is number three, right? That’s all. Then you have to really think hard, long and hard about it. If you have one child, then it makes it easy.

Victoria: Yes. Now, would you recommend the giving? Even if it’s a child? Would you recommend a business owner give the business?

Pete: Well, it is always situational, Victoria. It really depends on the situation. And if if the business owner has done a great job of putting aside money for retirement for their they and their spouse over the years and they feel that by giving this business to a child, it’s not going to affect my quality of life if it’s me and my the quality of life and our retirement years, then that could be an option.

Pete: A lot of people have gotten to that point in life where they could do that if you can’t do that, there are ways that you can accumulate funds within the business through some insurance programs where you can build value so that the the child and you could do this with employees as well. You can still value an insurance product over a period of time so that whether it’s a family member or employees in the business, they can go to the bank after a number of years and earn and be able to use that for collateral to earn the rest of the money for the bank and then pay you off.

Victoria: Okay. All right. Cool.

Pete: Way to go to because in a lot of cases, when you have employees or family members, they don’t have a big pile of cash to give you, right?

Victoria: Yeah, exactly. So do you think that the insurance avenue is the best route? Like, I know one of our members took out a SBA loan and paid off the owner with an SBA loan, and that was pricey. Yeah.

Pete: So that’s okay. And that works. It takes time to do that. The insurance product has worked. We have one. I can give you one example. We have a heating cooling, plumbing and electrical client that has been a client of ours for 13 years.

Victoria: Nice.

Pete: And they have done very, very well. We’ve helped them purchase other companies over time. They didn’t used to be have electrical or plumbing in their bailiwick. It was all AC. So we help them buy some over other companies over the last 13 years and they are transferring ownership to three employees of the business. One of them is now the president, She said.

Pete: She’s a great employee, does a really good job. She enjoys the numbers and she’s a good leader. And the other two employees are fine with the with her doing that. Right. But the owner now has less than three years. And at the end of that three year period, they will have enough money to go to the bank and borrow the rest.

Pete: And around it, several million dollars they’re going to buy this business for and the owner will be free and clear.

Victoria: Nice.

Pete: And in Florida.

Victoria: But I’m not sure about that. But yes, I mean, they storm.

Pete: They have a summer place on the lake, on the winter, so.

Victoria: Okay. So how does transferring to family members differ from transferring to a subset of employees? What are some of the how are the challenges different?

Pete: They have to be. One of the nice things about employees is that it has nothing to do with your family and hopefully you have done a good job of saving and investing so that you can take care of your family and the family doesn’t really care what happens to your business as long as their lifestyle is maintained. Right?

Pete: Your spouse, kids, whatever, as long as they’re comfortable and everybody’s happy. Right. So in that way, a simpler day in both of these cases, family and employee, you’ve got to be able to develop the leadership team. And that’s something we’re going to spend a lot of our time on. It helping develop other leaders other than the business owner.

Victoria: Right.

Pete: Our business owner is 50, 55, 60. It’s really not about them. They do need to be good leaders, of course. However, they really need to be focused on what’s the development of the next level of people. Right. If it’s employees that are going to be running the business, well, who’s good with numbers? Who’s great with people? Who is going to generate sales?

Pete: Who’s a great salesperson? And you’ve got to figure out if you have the right people on the team amongst those existing leaders to be able to perform those functions in a great way. When the business owner walks and the business owner usually has one or two things that they’re really passionate about that they’re they’re in deep. Right.

Victoria: Yes.

Pete: Right. And that’s where Peggy and I are to help them extricate themselves from the that which is not easy.

Victoria: No fun, especially if they got three years left to go. And if they’re stuck doing something they don’t like doing because that’s best for the company. And I guess they realize that.

Pete: But yeah, I work with a gentleman a few years ago, a guy named Jim, and he was a was an owner of an architectural firm, and I worked with him for Lenovo’s three years. And over that three year span of time, what we started with was a simple list of all the relationships that he had with outside entities and all the the wisdom that he had about code and all these various things and made sure there was somebody in the business that he was teaching that to.

Pete: And when we had 36 months, he had plenty of time to transfer that knowledge and he retired and felt really good about leaving the company. He didn’t leave middle large because he had taught a couple of people almost everything he knew and he had transferred over time the relationships that he’d built over 30 year, a 30 year career.

Victoria: You know, one of the things that I see happen occasionally, whether an owner is selling to employees or selling to a family member, is that they’ll dawdle around and not make a decision while the company is being built up by the sweat equity of the family member or the employees. Yeah, until they grow to the point they can’t afford to buy it, you know, or it’s way more expensive because they don’t get a credit for all the work they put in to get it to where it is today.

Victoria: What are what would you say to that owner who is doing that?

Pete: Well, you really again, it comes back to, I think starting early, if you start thinking about this is 2023, if I’m going to retire in 2033, I have plenty of time to help somebody else build value to be able to purchase my business. The insurance product is one way to do it. There’s some other ways to do it.

Pete: But if you think about it a lot in in early enough, then you’ll have the opportunity to get it to a position where they can buy it. And there are some businesses where it might make sense to go with a third party. If I’ve got a $100 million commercial construction company, that might make sense to sell to one of the big companies, right?

Victoria: So, you know, I know that sometimes businesses grow to the point like, let’s say it’s a remodeling company and they get to 15, 16, 20 million. It’s owned by one person, and then they want to sell it to their employees. But there’s just no way their employees could afford it. It would an insurance product be something that would help them overcome a business of that.

Pete: Size if you started early enough. And the whole idea is if I start ten years from now or ten, or if the target date is ten years from now, let’s just say for the heck of it. We pay $10,000 a month in premiums on this insurance product. That’s the avenue that you use to to build value over that ten year period.

Pete: It could be 20,000 a month, which a much bigger company. But there’s tax advantages to the to the existing employer, the company to that. So they’re putting aside funds. There’s some tax advantages. And the the people that are going to buy it have an incentive to grow the company to make sure they can pay that premium every year.

Pete: Okay.

Victoria: That makes sense.

Pete: Yeah, that’s my retirement. I’m going to make sure this company grows profitably so that my retirement’s there when I need it. So the third party sale is is an interesting way to the we have a client down in Texas that’s going through this now and what we did there a couple of years ago, I went down and actually before I went down there, we we got a list of we advertised for general manager.

Pete: We hired a general manager. I went down and helped them interview the candidates and we picked one gentleman. And this this person is very technically skilled and very focused on sales because that’s what the business owner of this $20 million operation was good at was sales. So we made sure this gentleman was involved in the industry and also really good at sales.

Pete: And now that he’s talking to buyers about selling this business and it’s worth more because he’s got someone who can take over for him when he leaves and he’s going to stay there for eight for 24 months. Okay. Yeah. To help ease the transition. But he is his replacement is in place so the owners don’t have to come in and do his job.

Victoria: Right.

Pete: And that will raise the value of your business when you transfer it.

Mark: You know, if you start early enough, obviously time is of the essence with 90% of this stuff. Right. If you start earlier, you’re you’re getting yourself in the position. But have you ever worked with anybody with those different types of ways as far as an alternate to compensate just increasing compensation with, say, phantom stocks and things like that that employees can take advantage of?

Mark: But what was the thing that there was a Victoria that’s there was a program, not a government program but it kind of you locked in an employee at 50% of if they bought the company, 50% of the value would be today’s value and the other 50% would be at the date of sale. So they they’re incentivized to grow it and make it.

Mark: Do you remember those? Yeah.

Victoria: And not penalized. You set it right 50% based on today, 50% based on ten years in the future. Five years. The future, whatever. Yeah.

Mark: Have you ever worked with anybody on those kinds of programs?

Pete: sure. This client in in Dallas. So the successful general manager candidate who is now there and running the brand in the place with the owner for the time being. Anyway, his compensation structure is set up in a way that the baseline of sales and profitability when he entered, that’s the base.

Victoria: Okay.

Pete: His compensation is tied to what he does since he started. So he has 2 million in sales. He’s going to make a significant amount more than his base salary.

Victoria:

Pete: When he does that and it really, if you pick the right person, you’ve got to have somebody who is motivated by net profit and increasing revenue profitably. Right. But if you find the right person, you sure you can make it very worthwhile to them? And the business has grown rapidly over the last ten years, but it’s an a big market.

Pete: He’s got a responsible for eight states and wow, he’s got a lot of opportunity. And this person, I think, is perfect for that. And he’s excited about the opportunity.

Victoria: So tell us a little bit about the ESOP. I know a lot of I’ve heard a lot of people mumbling about it lately because we’ve had a couple of big companies, three or four big companies put it successfully into place.

Pete: Yeah. Yeah, we have a couple of them. One is a structural engineering company that went through it quite a few years ago that has about 100 employees. The other one is somewhat smaller. It’s a flooring company with about 35 to 40 employees and they both have successfully done that. The engineering company did it a while ago and the foreign company did it within the last year.

Pete: And the good thing about it is the owner is going to have a big tax advantage when when that thing goes through, they get a huge benefit in not paying as much in federal tax. When that happens. So it’s just the structure of the deal. You’ve got to be a certain size, a certain minimum free cash flow in order to really make it make sense, because the the accounting fees and the legal fees are pretty high.

Victoria: Yeah.

Pete: But if if you can save a million or two or three on your taxes, it’s worth paying a half a million or three quarters of a million and all the prep work. Wow. Yeah. Really have to be. It’s not going to be a $5 million business that can go through that.

Victoria: Right. You know, I looked into it at one point. I thought the concept was fabulous and the end was told exactly that. We’re just not big enough.

Pete: So but the good news is the employees and I’m thinking of the engineering company because we they’ve been at this for quite a few years. They are all, all ears on how the how the panel works, how the balance sheet looks. They want to know these are all engineers, Right? So, yeah, there are a number of people and they want to see how they’re doing and how the value of their stock is.

Pete: And it really does motivate people to make sure they’re not wasting supplies or spending money on things that are frivolous.

Victoria: Yes.

Pete: It it kind of makes everybody an owner and it it can really help you with profitability.

Victoria: One person I remember told me they had gone in to do an ESOP and he was not happy because there were three or four of them in charge and they could not make a decision because I just none of them agreed with one at all.

Pete: Yeah, I mean, we see that in our family businesses too. And when you have to, it’s challenging, but when you have three or four or more, it gets even more challenging. So you have to have some sometimes outside help to make decisions, right?

Victoria: Yeah. Interesting. Okay. So depending on no matter what direction one chooses, what are some of the things that these business owners should be doing that will help them when they decide to exit?

Pete: So one big thing is start early. We mentioned that already number two is think about your the things that you’re doing now and think about the value of the things that you’re doing. If I’m a great I mentioned this gentleman in Dallas. If you’re in the middle of all the sales decision making or in a lot of the actual sales yourself, you got to replace yourself.

Victoria: Right.

Pete: Right. Otherwise, the new buyer is going to have to replace you. And there’s huge risk involved in that. If if the first person I hire fails, which happens sometimes. Yep. That might take me a year and a half to get to where that business owner is properly replaced. So if you’re the business owner now, if you can replace yourself now while you still own it, you’re going to be in a much better position to sell your business to some third party.

Pete: Because if I can demonstrate it, which this gentleman in Dallas has done, I’ve got a very smart, younger hustler that knows the technical side. I mean, this guy, not not in a bad way, I mean, right. He’s a worker and loves to sell. And he’s a very good in management and understands the technical side of business.

Pete: If you’ve got that person in place and they’ve demonstrated their ability, you’re going to be able to walk away much easier.

Victoria: Okay, cool.

Pete: Think developing your leadership team, I guess, as they overcome.

Victoria: Well, so how can you prepare for anyone? How can we prepare our team for the owner to exit?

Pete: Well, one of the things is for the owner is to think about all the things you do. Write them down and then think about one year or two years, three years from now. Some of these things I don’t enjoy, well, I should stop doing those.

Victoria: Because the owner.

Pete: Should choose not to do this or that, because I don’t really enjoy it. Right. Somebody in your building that does like to do that kind of work. So start giving or getting rid of some of the things you just don’t like.

Victoria: Yeah. Okay.

Pete: And then for each person in your organization, whether you have an operations manager or a sales manager or an air person. Every every one of your leaders within your company should have a person next in line to them that they’re developing in the event they move up in the organization or take on more responsibility.

Victoria: Okay.

Pete: So give everybody in the organization is in a learning mode and a development mode all the time. It’s going to be easier for you to walk out of the building. And no, it’ll keep running.

Victoria: Okay. That’s that’s a pretty good advice. I love the concept of getting rid of what you don’t like to do because there’s some stuff like that. Seems like what a lot of our clients things they want to get out of first is estimating, you know, when they get to the level or the just selling and estimating. And then sales is oftentimes the last thing.

Victoria: And a lot of times these business owners, they need two or three people to cover the same amount of sales, right? Yeah. Right. Now, you didn’t start in this remodeling industry, right? You started as working in all industries.

Pete: No. I have been coaching Victoria for 19 years, 19 years this summer. And we started in a lot of different industries. And before that, I was a manager at a chemical plant.

Victoria: okay.

Pete: All right, good. My undergraduate degrees in chemical engineering. I got an MBA about 20 some years ago and then got the bug to start my own business. And that’s how I got into coaching. I saw. I enjoy working with people and helping them develop. And really that’s what we do with our business owners and help them to learn, learn faster and do more with less effort.

Victoria: And that is certainly what I hear from the members who work with you. So awesome.

Mark: Good. Well, Pete, we have a way that we exit the show and that’s the lightning round. Are you ready for that?

Pete: yeah. As long as I don’t get hit by lightning. And now here’s a reminders advantage. Lightning round. It’s a track.

Mark: All right, We’re going to put 60 seconds on the clock. What is your favorite business book and why?

Pete: Well, you know, this is kind of a funny one, but it’s our book. It’s the honest truth about leadership, if I can be. But other than that, I’ve got several. It just depends on the topic. So we have a lot of our business owners and leaders who are challenged with time, and a great time management book is a comic habit.

Victoria: It’s going around the circuit right now.

Pete: That’s a good one.

Mark: If you weren’t a consultant, what do you think you’d be doing?

Victoria:

Pete: You know, maybe. I don’t know. I used to. If I was a little younger, I’d probably be shooting pool somewhere. Like, maybe a ski instructor. But I think I’m a little past that.

Mark: What are you not very good at?

Pete: I can be impatient at times. So when I’m done with something, I’m done, you know, and I just want to stop.

Mark: What’s better? Reggae or jazz?

Pete: jazz.

Mark: Do you sing in the shower?

Pete: Sometimes, yeah. Sure.

Mark: What was the last thing you said? The car.

Pete: To?

Mark: What was the last thing you sang?

Pete: I don’t know. Well, funny. Bob Marley. Yeah.

Victoria: So is reggae really less than jazz? I mean.

Pete: You know, I’m kind of open to that.

Victoria: Good movie on him coming up. So this is awesome. Now, I have two things that I want to ask you about. First is if people want to learn more about what you and Peg do, how do they find out more about you?

Pete: Well, they can go to our website action coach coach Columbus dot com and it has lists of clients. It has testimonials. It has videos of both of us if you want to watch those kind of things. And you can also buy our book, The Honest Truth about Leadership.

Victoria: And you can go to our Web site to learn more about you as well. Remodelers have edgecomb, right? So lots of ways. All right. Thank you so much for what you’ve told us so far, but I’m not going to let you go until you share your five words of wisdom with our listening audience and why they resonate with you.

Pete: All right. So here we go. It’s not five words, it’s less. Is that okay?

Victoria: Yes, that’s fine.

Pete: It’s. Yeah, Pain plus reflection equals progress. You know, that actually is five words.

Victoria: Three surprised yourself. Okay, So why did those words resonate with you? Repeat them one more time and then tell us.

Pete: Pain plus reflection equals progress. So I lose the sale. If I can dissect what did I do or not do that caused that to happen, I’m going to make progress the next hundred times I meet with a potential client. Right. And if I do that every time I have an interaction with it, with a potential client, if I reflect every time, I’m going to get better and better and better.

Pete: And that’s really what it’s all about, is getting better.

Victoria: All right, great. That’s awesome. I love them. Pete, thank you so much. We look forward to working with you many times and for many years to come.

Pete: Same here. Victoria and Mark, great to see both of you.

Victoria: Thank you for being here.

Mark: All right.

Victoria: Bye bye. You know, I should have asked him how often are remodelers successful in selling their business, even though there’s these four great options?

Mark: That’s an that’s a good question to.

Victoria: Ask that I didn’t even think about that. But, you know, I haven’t heard of that many businesses being successfully sold over the, what, 35 years I’ve been doing it? I mean, I bet it’s fewer than 20, although I do feel it’s picking up steam.

Mark: It feels like it is 25 years ago, probably not so much. Right.

Victoria: But I will say I think all the companies were smaller than they did.

Mark: Sophisticated right and such. But now you’re building machines that you know, are built to sell and have high profit. And at the end of the day, if you have something that makes financial sense to buy, it’s it’s going to sell.

Victoria: Yeah, but wouldn’t you think. Yes, you just.

Mark: Get in front of the right people.

Victoria: Yeah. Interesting topic though. I mean, and I love the obviously I love the part about starting early, but.

Mark: This, you know, I could see not even bother in selling to your kids because you’re going to give them all the money back anyway when you die.

Victoria: So let’s just spend it all.

Mark: Well, I guess.

Victoria: I’m spending all mine like kids. Got to be able to make it on their own.

Mark: Is that what you’re doing? I want to go have fun. Are they going to do that? I want to thank Pete for sharing these insights into exit strategies. And we want to thank you for listening week in and week out. I’m Mark, Harare.

Victoria: And I’m Victoria Downing. See you next time.