Twenty-six years ago, Terry McKee had a new stylist start at Nuovo, his Sarasota-based salon.
“Right off the bat, James told me he was not going to be an ordinary employee,” McKee says. “He wanted to advance, and that’s what he did. He went from stylist to educator to part owner.”
Partnering with James Amato, whose personality and work style is the polar opposite of McKee’s wasn’t always easy, but it was successful. The two own three Nuovo locations and are considering a fourth. But they’re also considering their next act.
“We’re still 14-15 years away from retirement, but it’s time for us to start thinking about it,” McKee says.
Just as McKee did all those years ago, he and Amato will most likely bring on another partner or two to take the reins of the business.
“We’ll have a long transition period,” he says. “And I know how to help guide someone through ownership.”
But he also knows what he doesn’t know, which is why he reached out to Tom Kuhn, CEO and founder of Qnity for guidance. “Tom’s adept at this, and has roadmaps for many scenarios—he’s an atlas of strategies for partnering and preparing to exit your business” McKee says.
“I started doing this a few years ago with a couple of owners who knew a transition was on the horizon, but hadn’t made any plans for it,” Kuhn says. “They didn’t know where to start and needed someone to help structure their thinking.”
Around the same time he was educating and working with these owners, Kuhn had other owners approach him with similar requests. These requests led to Kuhn’s creation of a package service that includes A valuation, education, coaching, case studies, questionnaires and more.
“Out of 25 or so transitioning clients I have right now, all but five are on this package,” Kuhn says. “It’s affordable and comprehensive.”
Ready to dive in and figure out your next step? Start by evaluating these questions.
Questions to Ask When Developing Your Exit Strategy
1. Do you want to grow or go?
Before you can put a plan in place to leave your business, you need to determine if you’re ready to go. Kuhn says the answer to this question can often be a combination of the two. “It’s not typical that people want to just go,” he says. “Often they want to grow, then go.”
2. Have you determined your readiness?
There are two types of readiness: business readiness and owner readiness. Kuhn says you need to have both.
“For the business side, you need to ask: ‘Are the financials clean? Do I know where the contracts are? What does my lease look like? Am I profitable?’ A lack of clean financials can make the process drag on,” he says. “For owner readiness, you need to determine if you are emotionally ready to exit.”
3. What do you think your business is worth?
“Whatever you think your business is worth is an important data point, but you need an objective outside business valuation as well,” Kuhn says. Qnity offers salon-specific business valuation services.
4. What’s your real estate situation?
“If the owner also owns the building the salon is in, the salon and real estate should be in separate businesses,” Kuhn says. “There should be an appraisal for the business and a separate appraisal for the real estate.”
In some cases, the owner may sell the business, but keep the real estate and become the landlord. On the other hand, if you have a lease, examine it carefully long before getting ready to sell the business.
“I’ve seen owners who think they’re going off into the sunset after selling, but their name is still on the lease for x amount of years,” he says. “So when you renew your lease, pay close attention to assignment clauses and try to get as much flexibility as you possibly can so the landlord doesn’t prohibit someone else from taking over the lease.”
5. What are you selling?
“In selling their business, many owners think they can charge separately for things like the salon name, domain names and marketing materials,” Kuhn says. “But they’re typically selling intangible assets, and these items usually are included in the price of the business.”
6. Who will you sell to? The chances are high you’ll sell to a key employee.
“We give advice on determining that employee and creating a conversation,” Kuhn says. “Sometimes I’m invited into the conversation to help make it more professional and create detachment,” he adds. “You must use great care in the words you use and distinguish between promise and intent. Confidentiality and non-disclosure are also hugely important.”
To prevent bad partnership outcomes, everything should be decided up front and put in writing. “Typically this is in a shareholders agreement and includes all the different nuances or possibilities that could happen,” Kuhn says. “It should have a buy/sell agreement embedded in it.”
7. If I sell to a key employee, how is the sale structured?
Whether it’s one employee or multiple people will affect the structure of your sale. Do you have multiple locations? If so, will the new owner take over the whole enterprise or will there be one owner per location?
You’ll need legal counsel and a tax accountant for the deal, but you can save on legal fees with careful planning on the front end.
“You’ll spend more money on attorney fees if the lawyer has to spend a lot of time figuring out your intentions,” Kuhn says. “The clearer you can present information to your lawyer, the more you’ll save on fees.”
“You also need to take into account your buyer’s family,” Kuhn says. “You aren’t just talking to the key employee—the employee is talking to her spouse, mom, dad—there’s a group of people who are advising your buyer.
“You don’t know what you don’t know,” he says. “Terminology, what the process will look like—this is where I can help owners. Get educated before you jump into it.”
8. Do you have an onboarding process for the new owner?
When bringing on a key employee, onboarding into the owner position is a gradual process.
“It’s not as disruptive to the business as selling to a non-key employee,” Kuhn says. “When an owner sells to someone not involved in the business, the new owner has a heightened risk of losing staff.”
“But if the business is sold to an internal staff member, would that happen?” Kuhn asks. “The transition needs to be very intentional if you use someone from the outside. The integration between the past and future owner is scary for the staff, and a new owner can serve as a trigger for someone who is a fence sitter.”
9. Do I need an intermediary?
Conversations between a current and future owner are sometimes best done through an intermediary to remove emotion.
“It can be complicated and confusing, but at the end of the day, there’s an opportunity to preserve the legacy and monetize,” Kuhn says.
If you feel too emotional or that you may send mixed messages during the process, an intermediary person can help.
10. What’s my next act?
To successfully transition out of the business, you must have a plan for your next act. Whether you’re planning a second career or a retirement filled with travel, know what your life is going to look like post-ownership.
It’s also important to understand what’s at stake if you don’t plan your transition. “If you do nothing, there’s a high likelihood you’ll be with the other 87% of businesses in the U.S. that don’t transition,” Kuhn says. “A lack of planning is why this happens.”
Disclaimer: The views provided in this article should be considered information only. Use discretion and seek professional advice for your unique situation.
For reprint and licensing requests for this article, Click here.