Nothing lasts forever, and your starring role in your business will eventually come to an end. How you approach the end of your career will very much depend on your age and when and how you intend to depart, and also on whether you plan to head into retirement, start another business, or do something completely different.
It’s all well and good building a successful company, but at some point you will want, or need, to liquidate your assets. You’ll want to get out with a chunk of hard-earned money or dividend-earning shares. Being company rich and cash poor is to have all the responsibility and none of the fun. Even if you enjoy running your business, you may decide it’s time to retire, or there is always the possibility you might become ill and need to liquidate your assets in a hurry. This, of course, is the worst position to be in if you expect to get a good price for your business. Early planning, therefore, can save a lot of headaches down the road.
You may not be in a position to do what I did, but I’ll tell you the story of how I prepared my exit strategy almost forty years before I needed it. As with prenuptials, which are best negotiated before you get married (or shortly thereafter), exit strategies are best considered earlier rather than later.
When my company was only seven years old, I realized we were facing some serious issues, the biggest one being: How were we going to walk away from what we’d built? I had a business that consisted of a number of partners and franchisees. It wasn’t one company; it was seventeen, and I owned a significant percentage of each one! None of my partners could afford to buy me out, and I couldn’t afford to buy them out, so I asked myself the $64-million question (which would later become a $28-billion question): “Where’s our liquidity?”
That’s when I came up with the idea of consolidating into one company. My plan was to merge all seventeen partners and franchisees into one company. It took five years from the time I started bringing on board partners and franchisees until we amalgamated, but finally I consolidated the company. I have to admit, this process wasn’t without its challenges, and the ensuing years were some of the toughest in my business career. But after we consolidated, we had a company we could take public and in which we could share ownership.
It is interesting to note that if the two people who had the least equity at the time of consolidation had retained all their shares, their individual stock today would be worth $250 million.
One of the keys to managing success is having a realistic understanding of how successful you are. I’ve seen too many situations where people start enterprises, they enjoy immediate success (or at least some level of success), and they start spending money. It’s understandable that they want to enjoy the fruits of their labor, but they get way ahead of themselves and buy cars, houses, whatever. Of course, spouses are another major cause of concern. You may be managing and controlling your success, but what about your spouse? And what about your children; are they becoming spoiled?
Remember, especially in the early days, there are no guarantees as to how long your current level of success will last. Ask yourself, “Are my current revenues sustainable? Can I count on them?” Especially if you have just purchased a new house.
Some types of business are more dependable and consistent than others. Paychex, for instance, is a recurring revenue business, so it’s consistent and predictable. With a business like that, once you achieve a level of success, you can with some degree of certainty expect that it’s going to continue. That’s the huge benefit of a recurring revenue business. But if you’re in an industry or a business that has wild fluctuations, and during a successful period you over-enjoy your success, you could end up in a lot of trouble. One bit of advice I give to the entrepreneurs I work with about success is don’t get a big head, because you never know when a business can turn on you.
Another inherent danger with success is a desire to gamble on new ventures. People often think, I’ve been successful in this, so I can be successful in any venture I become involved in. When an entrepreneur starts to believe his or her own press, danger lurks just around the next bend. One of my favorite sayings is, “You can fail many times, but you only have to be successful once. But once you’re successful, don’t ever bet the farm on a new venture or idea.”
When to step down is completely up to you; there will be dozens of factors to take into consideration, ranging from how you feel about walking away and the potential value and salability of your company to the company’s future sustainability.
Whatever your situation, at some stage you will need to ask yourself: “Is my long-term goal selling the business at some point, or will I stay until they wheel me out in a box?” and “Do I want someone in my family to take over the business?” We’ll explore some of your options in this chapter, but for now, be honest. Do you from time to time ask yourself, “Geez, is it time to sell? I wonder what I might get for the company”? If you do, then perhaps you should do some strategic planning.
One thing I can guarantee is that it’s never too early to start thinking about your exit strategy. I admit I didn’t have an exit strategy from day one of Paychex, but I soon learned the necessity of planning for the day you want (or have) to step aside.
If you start to seriously consider selling your business, be very careful about making any long-term commitments such as real estate leases or the purchase of equipment. These can get in the way of a successful sale. New owners may not agree with the commitments, or they may obstruct the direction in which the new owner may want to take the company.
As far as employees are concerned, it’s best they are not aware of your intention to sell the company until much later in the sale process. It is natural for people to be apprehensive about the future of their jobs, and some may start seeking alternative employment. Although their fears may be understandable, they are often unfounded. Most acquirers will want key employees and senior management to remain under the new management; they may even offer incentive contracts to those people they see as integral to the company’s well-being.
If you decide to sell your business, there are several ways you can approach the sale, but first you might want to consider when and why you should explore this option before you consider how you might approach finding a buyer.
There are many reasons why you might decide to sell your business. You may have achieved all your goals and the business no longer challenges you. You may simply be bored, or you may have another business concept you would like to explore or invest in, or you might just decide now is the time to retire and spend more time with your family or on your hobbies.
There is no bad reason to sell your business, unless you are trying to unload it because it is experiencing major challenges.
Whatever your reason, spend some time considering what you will do after you sell. Many owners, especially those in their late forties and early fifties, sell and then find they are bored and miss the excitement of running a business. Of course, you can always start a new business or do what I did and start investing in up-and-coming businesses. A word of warning, though: if you sell and find you are drawn back into entrepreneurship, don’t bet the farm. I’ve seen people who have built a successful business, sell it, do extremely well financially, only to lose it all in a new venture. This happened to at least four of my original Paychex colleagues and they still regret it to this day, especially when their wives mention that they should have stayed with payroll processing.
Every circumstance is different. Sometimes you don’t have the luxury of being able to sell at the perfect time, just when your business is doing well, and you are ready to step back.
Here’s a story about how a little patience and persistence allowed us to sell at just the right moment.
I mentioned earlier that I had some serious issues with a company called Safe Site, where the controller of the company was kiting electronic cash transactions. As if dealing with the fallout of his actions weren’t enough, our predicament became public and our national competitor, Iron Mountain, approached us and tried to take advantage of our embarrassing situation. They offered us $14 million. We discussed this low offer at a board meeting, and I was told that if we didn’t accept their offer, we needed to find over $3 million in new capital. Everyone looked at me. If we were going to save the company, I’d have to come up with the money. I decided the time wasn’t right to sell—it’s never a good time to sell when you’re on the back foot. I increased my equity position and left Iron Mountain very disappointed. From that point, we started to climb our own mountain back to profitability.
A couple of years later I was attending an investment conference and an analyst friend approached me and asked whether we were interested in selling. It turned out the inquiry was from a company called Pierce Leahy. We entered into discussions, and they subsequently offered us $40 million. Not a bad hike from Iron Mountain’s offer of $14 million just a year or two before. I ran it by my principal partner, and he felt if we went back to Iron Mountain they would pay more. I contacted them and negotiated a price of $63 million. In just a few years we went from close to bankruptcy to financial success.
This is an object lesson in perseverance and knowing the right time to sell. Often you need to stick it out if you’re convinced it’s a good idea and the company will succeed over the long haul. Of course, as this situation also demonstrates, painfully, you need to be fully aware of your financial situation at all times. Not just to understand the basic financial statements, although they are vitally important, but to ensure there are sufficient checks and balances on anyone dealing with the company’s finances.
This can be a tough decision. It can also be fraught with danger. Before considering this option, be sure the business has a long-term future, that it is sustainable. Ask yourself if there are any new and improved products or services coming out that will affect your market. What about new technology? How might that impact your business? Will it require extensive investment or make what you sell obsolete?
It’s always tempting to believe, or wish, that your children or grandchildren have the ability to take on your business and even potentially take it to new heights. You need to be honest with yourself. Do they have the skills, experience, and business acumen to keep your business growing? And how much of your time and help are you willing to give them to teach them how to be successful in the business?
If your company is doing well and you have a high profile, the likelihood is that at some point one of your competitors will knock on your door and make you an offer. Over the years Paychex bought companies for their software, for their customer lists, and for many other reasons.
If your thoughts turn toward selling, even if you are not immediately considering it, begin thinking about what an attractive but realistic price might be. What is the lowest reasonable amount that would still make you sit up and take notice? Too often business owners put a ridiculously high price on their company and they are never able to sell. If selling is even a possibility in your mind, it might be a good idea to get your business appraised.
In chapter 3, I discussed the importance of understanding financial statements; now is the time to ensure that all your financial information is up to date. A well-planned sale is likely to result in a far higher sale price than one where you suddenly and arbitrarily decide it’s time to sell. There are a lot of books available on the topic of succession planning, and these might be useful as a guide to how you should approach handing your business over to a new owner, whether that’s your grandchild or a competitor.
There are also companies or individual brokers who will sell your business for you; think of them like Realtors, but instead of selling your house, they are selling your business. Choose your broker wisely and interview several before making a decision. And don’t fall into the trap of hiring the one who says he or she can get the highest price for your business. Starting out too high can mean months and months of inaction; this can make it look like your business is not desirable. A realistic price will attract more than one suitor, which will put you in a better position to negotiate terms.
Businesses don’t sell overnight, and a sale can take several years to work its way through the many stages of due diligence toward an eventual change of ownership. Be patient.
This may seem a strange question, but unlike selling a house, where you can expect the purchaser to simply pay the going price on the day you close the deal, acquirers of businesses can be considerably more creative in how they offer to pay for your company.
The best scenario is you receive the asking price in cash with no strings attached. They pay, you walk, all good. Second best: they pay cash, but you don’t walk, well, at least not immediately. You hang around in a consultative role during a transition period, during which you may be able to negotiate some sort of “salary” or payment of some description.
Another option if your company is being purchased by a public company is to be paid with a mix of cash and stock. This, of course, can be a gamble, depending on the company making the purchase. If the company is doing well, then it might be worth the risk, but you will need to carry out some significant due diligence. If the company continues to do well and you hang on to the shares, you could end up with a substantial gain on the original sale. As I said, it’s a gamble; only you can decide whether the odds are in your favor.
Some acquirers will ask you, at least in part, to fund the sale. They may offer you 20 to 30 percent down and then plan to pay the rest over time. I would be very cautious about such deals. Often under new management, companies can experience a downturn in sales and profits. This can occur for many reasons; perhaps key employees or senior management staff decide to leave, or the new people are not as experienced or as effective in running the company as you were. Whatever the reason, if the company is not doing well, you will not be one of the first people they pay, believe me.
This type of deal is often used when handing the business over to family members, but there lies a future fraught with potential difficulty. I would only suggest contemplating this if you are convinced the person or persons involved have the capacity to make the business a continuing success. In these cases, you have to be hard-nosed and put familial allegiance and love to one side—this is business, and no one wins if the business fails.
One of the challenges you will face when you sell your business is that the acquirer will likely request that you stay on for anywhere from six months to five years until they get well adjusted to their acquisition. In many cases owners agree to this and then later have issues with the new owners and leave anyway. This can lead to a “so sue me” situation, which can be unpleasant for all parties. This is another reason to plan your exit from the business well in advance. If you leave too late, those “extra” few years can seem very long, especially if you were planning to buy a boat and sail off into the sunset.
Whatever course of action you decide to take, the biggest advice I can give you is once you have decided to sell the company and you have settled on a price and the terms of the sale, don’t spend any more time thinking about it—don’t look back. Enjoy what you’ve got; don’t continually chew on it, or it’ll drive you crazy.
You’ve sold, you’re free! What do you do now that you are cash rich and have a large hole in your life where your business used to be? Success affects different people in different ways. I’ve seen it all. This is not the time to immediately jump into something new. Take some time to evaluate your life and decide what you miss about owning your own business and what you are glad to leave behind. Several of my partners in Paychex decided to cut and run in the early days because they thought they could replicate their success in another industry. Some did okay, but others regret their decision to this day, and they check Paychex’s stock daily to see what they might have been worth had they stuck it out. That’s sad. “Never get ahead of yourself” is solid advice.
For my part, when I retired, I decided to invest in up-and-coming businesses where my expertise and experience might be useful. I currently work with twelve businesses, and they keep me busy enough and I’d like to say out of trouble, but hey, this is the world of business and there are no certainties.
If selling your business does not appeal to you, there is always the option of stepping back and putting someone else in charge of running the business. I stepped down as CEO of Paychex fourteen years ago, but I still own a percentage of the company and I’m chairman of the board. I no longer have any day-to-day responsibilities, but I have the comfort of being able to keep watch over the company while receiving annual dividends on my stock. This can seem to offer the best of both worlds, but it may not be for everyone.
Before I left, one of the concerns the new CEO raised in the interview process was that as I not only was the founder of Paychex but had been running it for over thirty years, I would be tempted to interfere with the way he might choose to run the company. It was a concern I could understand and relate to, so from the day I walked out of the office for the final time as CEO, I didn’t return for three months except to deal with a legal issue that specifically required my attendance. I did, however, have to return for a brief spell when our initial choice for CEO didn’t work out and we needed to hire someone different; that person, Marty Mucci, is CEO to this day. Even though I am still, as I mentioned, chairman of the board, I do not have an office in Paychex’s corporate headquarters.
My earlier advice about not looking back after selling your business also goes for stepping back from your business after putting someone else in charge. Choose well and leave them to run the business with minimal input, and only then when absolutely necessary.
The circumstances surrounding my retirement have surprised many business pundits, and they reflect my somewhat contrary philosophy about the corporate world. As I said previously, I’ve always thought that CEOs of US companies are paid too highly. My own salary was lower in comparison to most heads of similar-size companies. Not only that, my total remuneration package was also significantly lower. When one looks at a CEO’s salary, it only shows a fraction of their true compensation package—there are bonuses and stock options to include before arriving at the full amount. Too often CEOs and senior management enjoy salaries that are not linked to their company’s performance. I believe those running a company should only do well when the corporation is doing well.
When I finally stepped down as CEO of Paychex, I didn’t have a golden parachute and I took no stock options, even though they were offered. My retirement package was my desk and my credenza, two items I treasured.
Earlier I recommended you not look back on the sale of your company, and I’ll add to that not to look back at prior deals you made and wonder whether they were the right or wrong things to do. But I have to admit I have taken one or two looks back at my previous business life, though from a positive perspective.
I recently attended a staff appreciation picnic and was touched by the number of people who came up to say hi, the number of people who wanted a selfie, and those new to the firm who wanted to meet me and shake my hand.
One of the most memorable moments of my postretirement life was addressing Paychex employees at the 2016 Employee Meeting. Marty asked me to be a surprise guest, and I was blown away by the reception I received. Over four thousand employees applauded when I stepped on stage, and at the end of my speech the standing ovation was overwhelming.
After the event I spent two hours taking selfies with Paychex’s wonderful employees. It’s not often that the founder of a company remains as CEO for thirty-three years, and I think that sets me apart from many of today’s corporate leaders. I have a relationship with Paychex that is unique in the depth of its intimacy—a strange word perhaps when talking about a company, but fitting in this case, I think.
Running a company such as Paychex was a privilege, and I owe my success to the many dedicated people who worked alongside me over the years, not to mention our loyal customers.
In the final analysis, I achieved my aim of eventual liquidity and a sound exit strategy—and so can you.