“Ask The Profitability Coach,” Celebrating 50 Episodes of ProfitSense, with Host Bill McDermott
The tables were turned on host Bill McDermott, as he was joined by guest host John Ray to celebrate 50 episodes of ProfitSense. Bill answered a variety of questions and topics submitted by ProfitSense listeners, including starting a business the right way, cash flow and profitability-related questions, selling a business, and the emotional aspects of letting go of a business. If you want to hear the Profitability Coach in action, check out this episode! Bill offered numerous insights for business owners and covered a range of financial and emotional considerations.
About ProfitSense and Your Host, Bill McDermott
ProfitSense with Bill McDermott dives into the stories behind some of Atlanta’s successful businesses and business owners and the professionals that advise them. This show helps local business leaders get the word out about the important work they’re doing to serve their market, their community, and their profession. The show is presented by McDermott Financial Solutions. McDermott Financial helps business owners improve cash flow and profitability, find financing, break through barriers to expansion, and financially prepare to exit their business. The show archive can be found at profitsenseradio.com.
Bill McDermott is the Founder and CEO of McDermott Financial Solutions. When business owners want to increase their profitability, they don’t have the expertise to know where to start or what to do. Bill leverages his knowledge and relationships from 32 years as a banker to identify the hurdles getting in the way and create a plan to deliver profitability they never thought possible.
Bill currently serves as Treasurer for the Atlanta Executive Forum and has held previous positions as a board member for the Kennesaw State University Entrepreneurship Center and Gwinnett Habitat for Humanity and Treasurer for CEO NetWeavers. Bill is a graduate of Wake Forest University and he and his wife, Martha have called Atlanta home for over 40 years. Outside of work, Bill enjoys golf, traveling, and gardening.
Intro: [00:00:03] Broadcasting from the Business RadioX studio in Alpharetta, it’s time for Profit Sense with Bill McDermott.
John Ray: [00:00:18] And hello, everyone. This is not Bill McDermott. This is host John Ray with Business RadioX and I am here with Profit Sense host Bill McDermott. And we’re here to celebrate 50 episodes of Profit Sense. Bill, congratulations on this.
Bill McDermott: [00:00:36] Yeah. Thank you. And it’s good to be on this side of the mic, answering the questions rather than trying to figure out how to come up with them. So thank you for that.
John Ray: [00:00:44] Absolutely, absolutely. We were chit-chatting about how we could celebrate 50 episodes, which is quite a feat so congratulations on that work and all the businesses that you celebrated during that time. And what we decided was that Bill was so busy celebrating other businesses that Bill didn’t really talk a lot about his own perspectives and whatnot during his own show. So we decided that might be a good idea to answer some questions that he’s received over time and from – and we put out the word and asked folks to submit questions and we’ve got a few.
Bill McDermott: [00:01:23] Yeah, they certainly responded. I am grateful for that. And further, I just want to say, gosh, what a great ride 50 episodes have been, John, looking forward to the next 50. I had a dream of having a podcast where we can share stories of business owners and the professionals that advise them as a source of inspiration and encouragement to those who are thinking about becoming a business owner as well as those business owners that are out there in the trenches every day. So I’m grateful to you and North Fulton Business RadioX for giving me the voice to be able to do that.
John Ray: [00:02:01] We’re excited to be part of that for sure, and to certainly celebrate the work you do and celebrate all these great guests you’ve had over the years. So you’ve had some tremendous guests. And that was one of the things, too. We decided we couldn’t single out 1 or 2 of the best because we’d be excluding a whole lot of good ones, right?
Bill McDermott: [00:02:20] Yeah, that’s for sure. I think back to some of the very first interviews and certainly, the issues even three years ago, let alone outside the podcast, going back even further, it’ll actually be 15 years that The Profitability Coach exists this coming April. But the issues are the same regardless of time and whether it’s issues of growth, issues of talent, issues of finding financing for a business owner or even right now, the baby boomers are exiting their businesses and the issues are the same, even though times change.
John Ray: [00:03:01] There may be some folks that this is the first Profit Sense episode they’ve heard, so, and they may not know you like all your fans – you’ve got a lot of fans out there by the way – all your fans do. So for those that are new to Profit Sense and Bill McDermott, The Profitability Coach, why don’t you just give a brief introduction to your work?
Bill McDermott: [00:03:23] Yeah, sure. Business owners have a big dream for their company and they want to make it happen. Also, business owners want to improve cash flow and profitability, but they don’t know how. So we identify the hurdles that are getting in the way and deliver them profitability in their business that they never thought was possible. Further, every business owner has a dream of selling their business, achieving financial freedom, and riding off into the sunset that they’ve exited their business in their time and on their terms. And so we identify a plan to do that.
Bill McDermott: [00:04:00] Interesting statistic, only about 80%, or excuse me, only about 20% of business owners have a plan in writing for their exit. The other 80% don’t. And we can certainly talk more about that. But we also help business owners understand the transferable value in their business, come up with a business growth plan, how to be sure they have reliable financial statements, and then understand the tax implications, the timing and the terms of any transaction that they contemplate. So that’s me in a nutshell.
John Ray: [00:04:30] Yeah, that’s great work. Again, we’ve had, we put the word out, got a number of questions back. You also gave us some questions that are FAQs, right, frequently asked questions, that you get from clients and folks that are considering working with you. So let’s just dive in.
Bill McDermott: [00:04:47] Sounds good.
John Ray: [00:04:48] Okay. Here’s a basic one, very basic one. And I think there’s plenty of these folks out there. I’m tired of corporate America. What does it take to start a business? And I think where this is coming from is how do I do it right, right? I mean, yeah, how do I get off to a good start?
Bill McDermott: [00:05:07] Yeah, I would say the first thing, I was there 15 years ago. I was in corporate America. Now my dive into starting a business was by necessity. I was laid off and had to figure out a way to earn an income. But I think the first thing we have to start with before anything else is, does that person or do I have an entrepreneurial mindset? Am I growth-oriented? Meaning, not only growing my business but am I willing to embrace continually educating myself on how to be better? I think also the ability to overcome challenges as a business owner. You get down – you get knocked down a lot. And so how do you get up and dust yourself off and get back in the game?
Bill McDermott: [00:05:53] I think there needs to be a willingness to think outside the box. A lot of times there wasn’t really a profitability coach when I started 15 years ago. There are a lot of part-time CFOs out there, but I think I had several clients when I started telling me I had a little bit of a Blue Ocean Strategy, which is a book that talks about how you might play in your business that is unchartered waters but also very ripe with opportunities.
Bill McDermott: [00:06:24] And then I think, a willingness to experiment. I experimented first with helping business owners find financing when I came out of banking. That then turned into an experiment of actually doing the profitability coaching that I do to this day, and then my clients were asking me to help them exit their business since I had coached them. And so, I was willing to experiment with business exit planning. And that’s now become about half my business. So willingness to experiment.
Bill McDermott: [00:06:56] And then I would say the last thing as far as mindsets are being goal-oriented. I had a goal of replacing my income within a certain period of time and was successful at doing that and so those things, growth-oriented, open-minded, ability to overcome challenges, willingness to think outside the box, willingness to experiment, and then being goal-oriented. So that’s the mindset.
Bill McDermott: [00:07:20] The skill set, I’m going to take a page out of Jim Collins’ book, Good to Great. And I do this often with people that are thinking about going out on their own. Jim Collins said, “Greatness is where three circles intersect.” And the first inner – first circle is, what is it that I’m passionate about? I saw in my banking career that business owners really struggled with being financial managers. I saw that as a weakness. They didn’t take accounting in school. There’s no on-the-job training when you own the business. And I was passionate about, and still am, helping business owners become better.
Bill McDermott: [00:07:58] What are my best in the world at is his and my clients tell me I listen well. I have the ability to take concepts – complex concepts and put them in fairly simple language. They tell me I can connect the dots between their circumstances and their ideas, and I think they tell me I listen well. Now, my wife might disagree with them on that, but no, they do tell me I listen well. What am I best in the world at is the second one.
Bill McDermott: [00:08:27] And then the third is, can I take what I’m passionate about and what I’m best in the world at, and can I create an economic engine out of that and help business owners become better financial managers? I’m pretty good at listening, which means I can also provide coaching assistance. And can I coach business owners on how to become better financial managers and get paid to do that? And 15 years later, the answer is yes.
Bill McDermott: [00:08:54] So mindsets first, and then thinking about skill sets and answering those three questions and seeing where they intersect.
John Ray: [00:09:03] Yeah, that’s a good advice there. So you talked about coming out and you didn’t have the benefit of having a coach, but you were your own coach because you had that experience and that experience to understand what was important just because of the work you had done before. Right? And a lot of people don’t have that. They’ve got a passion for a business, but they don’t have that background in financials and understanding how to get started in that way. What – should someone hire someone to coach them right out of the box, or how should they make that decision? Let’s put it like that.
Bill McDermott: [00:09:47] Yeah. And I think first, there are a lot of DIY people out there. I’m just going to do it myself and I’m going to learn, and possibly starting out, being able to read some books, watch some videos might be helpful. But yeah, so I love to play golf. I have been a self-taught golfer for years, but I can – I hit a ceiling and so I decided, hey, I need to go to a golf coach and have him look at my swing and make recommendations. And so that coach takes me further than I can get myself because that coach has the experience and the expertise to spot things in my golf swing that I’m not doing that I should be doing and also identifies things that I am doing that I shouldn’t be doing.
Bill McDermott: [00:10:41] And profitability coaching is no different. You can probably get to a certain level of proficiency just on your own if you’re willing to put in the time and and make the effort. But there comes a point, I think, when in order to get to the next level, you do have to hire, you know, a coach. There are weight loss coaches, there are fitness coaches, there are golf coaches, and now there’s a profitability coach.
John Ray: [00:11:06] Yeah, there you go. So the next question has, I guess this is one that someone’s been in business for a while and what they say here is, “I’m having cash flow and profitability issues that are keeping me up at night. What should I do?”
Bill McDermott: [00:11:24] Yeah, that’s a great question and that’s a tough one. Studies show right now that about 85% of business owners stay awake at night over cash flow issues, not having a good level of finance and accounting experience and expertise maybe exacerbates that a little bit.
Bill McDermott: [00:11:43] I think the first place that you really have to look is your people. Generally, business owners will hire on skills but fire on behavior. And so, someone can be really skilled at a particular function but if their behavior is they’re very me-focused or they don’t play well with a team, they can have behavior that really is counterproductive to what the owner is trying to find. Probably the best place to start is, look at your people.
Bill McDermott: [00:12:22] Most organizations have a mission statement or have core values that they put out there. What’s been interesting, I’ve found that many business owners don’t really hire based on their core values, which are really behavior. And so people who don’t share your core values, frankly, are the wrong people for your organization and may diminish the productivity just by virtue of those behaviors. So wrong people.
Bill McDermott: [00:12:52] The other thing is, a lot of people are put in seats in an organization that don’t play to their strengths. If you put me in very detailed, repetitive functions over and over again, you’re going to – you’re going to kill me. I’m more of a big-picture guy. I kind of get – I get energies sapped from me doing that and identifying who are your wrong people, also identifying if people are in the wrong seats.
Bill McDermott: [00:13:24] And then the third thing I think that challenges cash flow is, do you have some empty seats? What I have found is business owners are very willing to hire for salespeople or for operations or production people but typically the accounting function in an organization is underappreciated and underfunded. And if you don’t have good financial information, you don’t know where your business is and you’re flying blind.
Bill McDermott: [00:13:54] I have a situation that I’m working on right now where there’s been a capital change, a significant capital change in the balance sheet of the business. And that capital change goes directly to the cash account that is unreconciled. We’re talking a six-figure amount here. And in this situation having poor accounting support is giving you misinformation or giving you information that isn’t conclusive in and of itself.
John Ray: [00:14:29] So let me jump in here and ask a quick question about this because I imagine there may be some folks wondering exactly what you meant by this. When you say the accounting function is underfunded, you mean that folks aren’t hiring professionals that have the quality they need for the size of business they have. Is that what you mean?
Bill McDermott: [00:14:50] That’s exactly what I mean.
John Ray: [00:14:51] Okay. Got it. Okay. So they may have a bookkeeper. Nothing against the bookkeeper, but they may have a bookkeeper when what they really need is, more of a controller or CFO type.
Bill McDermott: [00:15:02] Yeah.
John Ray: [00:15:02] Okay. Got it.
Bill McDermott: [00:15:03] So there’s a triangle that exists. And at the very base of the triangle, of course, is the accounting function. Some call it bookkeeping. The next level is if you need bookkeeping and accounting but you also need a certain amount of financial analysis, the ability to produce reports that are timely and accurate. That’s really a controller function.
John Ray: [00:15:22] Got it.
Bill McDermott: [00:15:22] If you’re looking for someone who is very strategic, most accounting is backward. You’re always looking back, not looking forward. A CFO-type person is going to be a little more forward-thinking, will do projections, will provide strategic advice on the benefits of pursuing a certain strategy. And the need is great at the bottom of the triangle, which is why accounting is so important. But if you need reports, as well as some ratio analysis or the ability to have someone full-time thinking strategically and thinking forward about your business, that’s when you bring in a full-time or part-time CFO.
John Ray: [00:15:59] Got it, got it. Anything more you wanted to add about cash flow profitability issues that are causing insomnia?
Bill McDermott: [00:16:09] Yeah, I think so. I’m talking with a client right now that has just recently hired a marketing firm. They don’t feel like they have a good strategy that is differentiating them in the marketplace. So if you’re having profitability issues, the number one weakness in growing firms is marketing.
Bill McDermott: [00:16:29] The other thing I’d say is documented processes are critical. If there are four people doing a sales function in an organization and there are four different processes, that’s highly inefficient, especially if all four of them aren’t the way the company wants it done. Having processes is one thing, but having them documented and followed by everybody is another.
Bill McDermott: [00:16:54] And I’d say the last thing probably is pure and simple. Sometimes cash flow and profitability issues come up because you don’t have enough money. And so, a line of credit is a great idea for the business owner that has ebbs and flows in cash flow and can borrow against that line and even that bumpiness out. And, you know, you need to have a certain level of prudence about using it. But I think it is important to have it when you need it.
John Ray: [00:17:27] Now, here’s one question that I think is a similar tack, but I think it may be aimed a little differently. And the question is, “I’ve hit the ceiling in my business and I feel like I’m stuck and I can’t get out. What do I do?” Now, this is not – I don’t think this is meant to get out of the business like an exit, right? This is more like get out of the rut. How do I get out of the rut? Right?
Bill McDermott: [00:17:54] Exactly.
John Ray: [00:17:54] Okay. Want to clarify that.
Bill McDermott: [00:17:57] Yeah. When the ox gets in the ditch –
John Ray: [00:17:59] Right.
Bill McDermott: [00:18:00] Who pulls the ox out?
John Ray: [00:18:01] Okay. And how – yeah. How do you get that ox out?
Bill McDermott: [00:18:03] Yeah. And so there – I think there are five M’s here that when businesses get stuck, the ways to get them out. The first one maybe you’ve lost momentum. So momentum would be the first M. If you’ve had a sales decline, if you’ve had a drop in productivity, if you’re a solopreneur and you’re out there and you’re making two calls every day, ten calls a week, these are face to face calls, 40 a month, you’ve generated a certain amount of momentum and the business is going to come because of that. And so all of a sudden if you decide, “Oh, I’m just a little tired. I’m not going to make 40 calls. I’m going to make 20.” Guess what? The input has been cut in half, so very likely sales could get cut in half unless you’re a really good closer. And if you’ve lost momentum, that would be one thing to look at. Look at whatever your key indicators are that might indicate. It could be a revenue decline, could be something else in the business.
Bill McDermott: [00:19:08] We just talked about it a second ago, but do I have enough money? If my business is stuck, maybe it’s a cash flow problem. Maybe I need to increase my line of credit. If I’d pay cash for a big piece of equipment and I needed that money for payroll, maybe I should have got a term loan for that piece of equipment and paid it off over three or five years, rather than taking that cash out that I need for payroll.
Bill McDermott: [00:19:32] Management is another thing. Sometimes business complexity outgrows its management team. So I have a client that has had 30% year-over-year growth for quite a few years. It used to be the owner and then a chief operating officer type. They have brought in a sales, operations, and marketing VP. So three managers in those key areas of sales, operations, and accounting. And the organization is better because of it because the complexity is higher.
Bill McDermott: [00:20:08] Do I have the right operating model? I’ll use my business as an example. I started out as an independent banker helping business owners find financing, and that was a great model for me. But all of a sudden my model expanded into those financing clients wanted coaching. And then my model changed again. Those that I had done financing and coaching for wanted to have exit planning. And so, a lot of times one of the M’s is your model. You don’t have the right model for your business.
Bill McDermott: [00:20:42] Talked a little bit about marketing. Again, maybe you’re not marketing the firm the right way. So if you’re stuck, I would look at momentum, money management, your model, operating model, and then marketing. And hopefully one of those things is the culprit and you can fix it.
John Ray: [00:20:59] Got it, got it. As you mentioned earlier, you do a lot of exit planning work for clients, and we’ve got several of those kind of questions as well. And one of them, I think there are two that are related. And one of them just relates to where we are having made it through COVID and the Great Recession. I want to sell my business. I’m tired. That’s a really good reason I think for a lot of people. What should I do?
Bill McDermott: [00:21:33] Yeah. There are a lot of business owners that have been through a lot over the past ten, 15 years.
John Ray: [00:21:39] Sure.
Bill McDermott: [00:21:39] Probably the first thing is, put your team together. It does take a village to sell a business. You do need a business broker to handle the transaction. Don’t try to sell your business yourself. Your business is your baby. The seller or excuse me the buyer might call your baby ugly unintentionally. And so there’s a lot of emotion wrapped up in that.
Bill McDermott: [00:21:59] Generally, this is the largest asset that a business owner has on their personal financial statement. Because it’s a big asset, it’s also going to potentially carry a pretty high tax bite when you sell it because you’re selling it for a gain. And that gain can be taxable either as a capital gain or ordinary income. The importance of having a CPA on your team can really help you figure out the best tax plan for that sale.
Bill McDermott: [00:22:27] Selling a business is just like selling a house. There’s a lot of legal documents. It’s a bigger transaction than a house in many cases. And so having the attorney that’s got expertise in business, sales, mergers and acquisitions is really critical.
Bill McDermott: [00:22:42] Sometimes bank financing is involved. So you want to get your buyer’s banker engaged, which means probably the seller is going to need to provide some financial information that buyer can use to obtain financing.
Bill McDermott: [00:22:56] And then finally, a business sale ends up in a liquidity event for the seller; it’s usually a large sum. And after taxes and after transaction fees and legal costs, there’s a wealth advisor that’s needed to manage that money for that seller in their retirement. And so, the ability to have that team is just absolutely critical.
John Ray: [00:23:21] Talk about timing here in terms of just the advance planning that needs to be done, because it’s selling a business is even more complicated than selling a house, right?
Bill McDermott: [00:23:39] Yeah, yeah.
John Ray: [00:23:39] It takes time. And certainly for you to continue the house analogy, to get the house ready for sale, right, to get the shrubs planted and all the – everything painted and all the things that you do for a house, you do similar things for a business, right?
Bill McDermott: [00:23:53] No question.
John Ray: [00:23:54] So what kind of time frame?
Bill McDermott: [00:23:56] In a perfect world, I think a lot of buyers will want to see reliable financial information that usually spans at least a three-year period. So that would be first. Having reliable financial statements really helps give integrity to the transaction. I also think in addition to that, you have to identify the value of the business that is actually being transferred. A solopreneur might be faced with the situation that the value of their business is the value minus themselves, and if the business is in one person and only in that person’s head, it’s very difficult to transfer that value. And transferable value is really about having a go-forward management team that can give the buyer some comfort, that it will be business as usual, and he has the ability to transition management if that’s his choice or her choice and then, you know, move on from there.
Bill McDermott: [00:25:00] I also think it’s important to create a business growth plan. I’m working with one client right now who’s in the e-commerce space, and they have done some marketing that has really given them a really increased gross margin in their business. And so showing how you can increase profitability is really key. And then you also basically have to be able to tell the buyer how you manage the business, how do you grow the business and give them the best you can, a playbook of how you do what you do.
Bill McDermott: [00:25:42] I would also say that you had mentioned taxes before; understanding the taxes. The sales price is one thing, just to use your house analogy, but by the time you subtract the mortgage origination fee, the title insurance, the attorney’s fees, the intangibles taxes, all those other closing and recording costs, it’s not the gross, it’s the net.
John Ray: [00:26:05] Yeah. Right? Yeah.
Bill McDermott: [00:26:07] And so for business owners, they need to understand what’s the tax bite going to be. If it is an asset sale, they’re responsible for the liabilities. So if if there’s a line of credit in the business and the line of credit has to be paid off, the business broker will have a fee. And that village that I just mentioned needs to be prepared to walk the business owner through with what’s his walkaway number, not the sales price of the business.
John Ray: [00:26:32] Got it. So a question in a similar vein, this is not a business owner that’s necessarily tired, although they may be, but their – the thrust of their question is around this economy that we find ourselves in. So what – should I sell my business in this economy? Or I think maybe what they mean is because of this economy, what they’re saying is interest rates with interest rates up fairly significantly relative to what we enjoyed for several years, and just the uncertainty that exists, even though the economy’s been pretty decent overall, the uncertainty that exists in the economy and in the world in general.
Bill McDermott: [00:27:19] Yeah, I think all those factors certainly play into it. I’m going to use my analogy. So I’m a lousy investor. I would love to be able to time the market where I’m buying low and selling high. But I think what I’ve learned is, trying to time the market is hard, but figuring out a long time to stay in the market is what’s important. So understanding whether it’s the right time to sell, if certainly if economic conditions are in the industry.
Bill McDermott: [00:27:53] Let’s take the steel industry. Construction, especially in Atlanta, is certainly on the rise. I’m not sure it’s really been affected, at least locally, by some of the economic uncertainty. I still see a lot of cranes in downtown Atlanta and other cities. And if you’re in the steel business, would it be the right time to sell because steel is at a high price? Yeah, maybe.
Bill McDermott: [00:28:19] I think maybe, more importantly, we really never know what the circumstances exist for the buyer. And so I’m going to go back to that business owner that’s asking themselves, is this the right time to sell maybe the better question is if I were a buyer who would I buy and why? And in a case where I have several professional services firms that I’m working with both play in very distinct niches which are on the rise. But the reality is both of the owners are in their either late 60s or mid-70s. They are tired. Is it the right time to sell for them? The answer to that, I think, is yes. And is it the right time to buy? Because you have baby boomer business owners that are motivated to sell. That means yes. Now might be the right time to buy. But again, I think in this case, beauty is in the eye of the beholder, which is the buyer in this case. So I think figuring out whether it’s the right time to sell or not certainly are the business owners’ circumstances that selling but also understanding what the buyer’s motivation might be for buying.
John Ray: [00:29:46] Here’s another question. This gets back, Bill, to the issue about planning ahead for a sale. So this individual says, “I understand that I need time to properly plan for an exit. But the problem is I’ve just had a catastrophic health diagnosis and I fear I don’t have that time. What should I do?”
Bill McDermott: [00:30:15] Yeah, obviously an incredibly difficult situation that’s probably packed with emotion. I think what’s your – I’ll go back to the three T’s. Timing in that case is critical. And so whatever is going to be done is going to be done in a compressed time window. And so, generally, I think if you’re going fast, you may need to be a little more flexible in your price, and you may need to be a little bit more flexible in your terms.
Bill McDermott: [00:30:54] And so understanding that of those three, if the timing is compressed, then possibly you won’t have had the time to go through a process of maximizing the value, similar to, “Hey, I need to sell my house because I’ve been relocated. And by the way, I got to relocate in 60 or 90 days.” And so, I think because you need that equity for the house where you’re going, you might need to be a little bit more flexible on your price.
John Ray: [00:31:26] Yeah. Well, Godspeed to that person for sure.
Bill McDermott: [00:31:32] Yeah, absolutely.
John Ray: [00:31:34] Again, a similar question about selling. So this relates to who you’re selling to, who you’re selling that business to. So this individual asks, “My children are not interested in being a part of my business, so they don’t – they’re not a succession – a part of my succession plan for the business. I’m thinking about selling to my key employees. Should I do that? What are the – what do I need to think about as I consider that?” Those are the questions here that this individual has.
Bill McDermott: [00:32:12] Yeah. And I’ve got two specific clients that I’m working with right now and one that I completed. And let’s talk about that. The one that I completed was a scenario where the buyers bought it from the owners of the company. They did have a certain amount of equity. They were able to get about 50% of the purchase price in a bank loan so it was paid over ten years, but there was about 40% left that they didn’t have the cash for and couldn’t borrow. And so, in this case, the seller, in order to sell it to the employees, took a seller note. That seller note was subordinated to the bank. And so, the buyers got the business. They’re running it. The seller took half cash, half note, and basically got half of the money upfront, but also took a note that mirrors the banknote. And what happens there is a lot of execution risk on behalf of the buyers because the seller is really tied to that transaction until his or her note gets paid, and the sale did occur.
Bill McDermott: [00:33:32] And so, the question is, if I sell my business to key employees, first the key employees may not have the cash that either a private equity firm or a strategic buyer may have, so there’s generally more transaction risk. The other thing is sometimes a seller is willing to be accommodating to those key employees because those employees have helped the owner build the value of the business. So in some of those instances, they’re willing to offer a discount off of what the market value would be just to see it succeed with the employees.
Bill McDermott: [00:34:09] But generally, if you’re selling it to key employees, the cash piece is always going to be difficult because they don’t have that much money. And then secondly, sometimes to make the deal work, the seller has to drop the price in order to make that work.
John Ray: [00:34:24] Right. You’ve got to evaluate the fitness of those key employees too, right? Just because they were successful key employees, obviously they’re successful if their key, doesn’t make them automatically great business owners. Right? So I think that may be part of the question too, right?
Bill McDermott: [00:34:42] Yeah. And to that point, I’ve had situations where there were buy-sell agreements in place, but those buy-sell agreements weren’t funded by insurance. And so, we had a situation where a business unfortunately got sold because one of the owners was killed in a car accident and there was no life insurance. And so all of a sudden the estate of the deceased person just became a co-owner with the remaining survivor. And the estate doesn’t want the stock, the estate wants the cash.
Bill McDermott: [00:35:18] Another situation that I can think of that comes up is, gosh, what if one of the management team all of a sudden comes down with cancer or some kind of life-threatening condition or disease that somehow impacts that healthy owner in a material way? Unfortunately, life in businesses can get messy from time to time, making sure that you have adequate plans and safety nets in place in order to make those things work.
John Ray: [00:35:51] Another related – again related question. You referenced seller notes earlier. This question relates exactly, precisely to that. How do I know that when – how do I know when taking a seller note is okay? And how do I evaluate whether that’s a good idea or not?
Bill McDermott: [00:36:14] Yeah. So there’s certainly a financial component of that. So let’s say I sold my business. I took back a seller note for ten years in 3% inflation rate. Since I’m getting paid back over ten years, the present value of that ten-year payment stream is much less than if I got the cash today and could invest it. So certainly, you have payment risk over that ten years if the note isn’t paid. So that would be number one.
Bill McDermott: [00:36:49] Number two would be, sometimes it may not be right financially but you really want to sell the company. And a seller note is a means to an end. And in that situation, I think you have to figure – if I don’t take the seller note, what are the possibilities of me selling it to my employees? And generally, they’re not going to have access to access to money to cover the difference. And the owner accommodates and does the transaction just to make the deal work.
John Ray: [00:37:28] Right, right. Here’s one final one. And I think this is a nonfinancial question, actually. I think it’s – what this business owner is getting at is just the mentality of selling. Right? And I think what it gets down to for them if they’ve – I’m going to summarize what I have here. How do I know that I’m emotionally ready to sell, that I’m ready to let go of my baby, as you call it, as you called it earlier, right? How do I know that I’m doing the right thing from an emotional point of view? Because my identity has been tied up in this business for a long time.
Bill McDermott: [00:38:14] Yeah.
John Ray: [00:38:16] That’s a pretty prescient question, isn’t it?
Bill McDermott: [00:38:17] That’s very much so. Let me contemplate on that for a moment. I think, first, probably my closest experience to selling a business is – so I have two daughters. I’ve walked both daughters down the aisle and given them away in marriage. And so metaphorically, I think selling a business which might be your baby, selling it to someone else is, in essence, walking down the aisle and giving that business to another person.
Bill McDermott: [00:38:52] And, John, that’s really hard. I wasn’t prepared the first time. I wasn’t prepared the second time. But I think you know that you’re ready possibly when you’ve done everything that you can do to get your business ready. And then, so, metaphorically walking down the aisle and selling your business is the person that you’re selling it to has the ability to take it to the next level so your baby lives on. It’s just in the care of someone else.
Bill McDermott: [00:39:33] So, maybe the answer is to a really good question, if you feel like you’ve taken it as far as you can, knowing that there’s someone else who can take it on and make it better, then feel content that you’ve done the very best that you could, but someone else is going to pick up where you left off and carry it and make it even better.
John Ray: [00:39:57] We don’t know the circumstances of this individual, but I would imagine part of what’s on their mind is exactly what you just touched on, which is like, how do I be content with someone else making those day-to-day decisions about the direction the business is going to go that I’m so used to doing, and how do I be at peace with that.
Bill McDermott: [00:40:23] Yeah. And I think the other thing is, as we have all built businesses, we have surrounded ourselves with groups of people, whether they’re professional advisors or coworkers that we’ve all gained from. And so, somehow the idea of that business continuing on and someone maybe seeing it through a different lens than what you’re seeing it and expanding its possibilities, you know, I think, and you and I’ve talked about this, having a generosity mindset, having a mindset where I can’t be all things to all people but I’ve done the very best I can, but there is someone out there who can take it and make it bigger and better and provide more jobs and have more benefit to the community. So by passing it on in a generosity mindset, we know that there’s someone out there who can make it bigger and better than even we could imagine it to be. And if it happens, that’s a beautiful thing.
Bill McDermott: [00:41:29] Yeah, it is a beautiful thing. And kudos to this business owner, right? Because a lot of business owners don’t think about that piece of the transaction. And that is a really important part of it. They get all the financial advice and the tax advice and the whatnot, the legal advice, but they don’t prepare for the emotional changes that they’re going to have to navigate.
Bill McDermott: [00:41:52] Yeah. And I think what’s interesting here and you’re touching on something that I’ve read recently, CEOs that are selling businesses need to treat the soft stuff, the emotion, and everything that is tied to the transaction as hard stuff. And so, treating the soft stuff as hard stuff really helps prepare us emotionally for the sale. And that’s equally necessary to prepare for the actual sale itself, the legal and the money aspects.
John Ray: [00:42:27] So, just one final question. I’m just curious. This is a question from me as we wrap this up. And this has been fantastic, Bill. So thank you for taking the time to do this. So in your work as a profitability coach, how much of your work gets into the emotions that maybe the business owner didn’t intend? But all that comes out and maybe you end up being an armchair therapist sometimes when it comes to some of these issues, right?
Bill McDermott: [00:42:55] Yeah. So I have one client whom we tease each other all the time, saying, “Okay, Mr. Client, I’m putting on my white collar and we’re going into confessional.” So, yeah, we’re emotional beings. We were wired that way. I was talking to a business owner this morning and just talked about the interpersonal dynamics of he and his management team and there are emotionally charged meetings that are going on all the time.
Bill McDermott: [00:43:28] And so, all of us have this fight or flight mentality that’s going on in our mind all the time. And at times we’re bouncing back and forth between those two things, but somehow meeting in the middle and creating good resonance and figuring out ways to work together and get along and help each other are really critical to a CEO’s success. You can have a great vision and a great strategy, but if you have a management team that just doesn’t know how to work together, that vision can turn into a nightmare. So, I get involved in the emotion all the time, 75, 80% easy.
John Ray: [00:44:13] So if you need a business therapist, Bill McDermott is available. Bill, this has been great. I can’t imagine that there aren’t some folks that if they don’t already know how to get in touch with you, that they need to know right now. So let’s tell them how they can find out more about you and your work.
Bill McDermott: [00:44:32] Sure. They can go to theprofitabilitycoach.net, is our website. My phone number is (770) 597-3136. And email address is firstname.lastname@example.org.
Bill McDermott: [00:44:49] And, John, I just want to say thank you for inspiring me to start a podcast. I think it’s been a little over three years now. The podcast for me has been a great experience. It’s been more than I ever thought it could be, and I’ve also found it just delightful to hear stories from other businesses and business owners. And I will share a lot of those interviewees have actually gone on to become clients as well. So I’m just really grateful to you and North Fulton Business RadioX for the opportunity to be one of your show hosts.
John Ray: [00:45:32] Yeah, congratulations on your success. You deserve every bit of it. And congratulations on that great work and attracting people to you and the way you have. That’s fantastic.
Bill McDermott: [00:45:43] And happy 50th. Let’s make 50 more. What do you say?
John Ray: [00:45:45] Happy 50th. Let’s make 50 more.
John Ray: [00:45:48] And here’s the good news for all your listeners. They’re going to get a lot better host on the next show. They’ll get Bill McDermott back. So, Bill, congratulations again on 50 shows.
John Ray: [00:45:59] And, folks, let’s again – please do come back and check out, if you haven’t checked out Bill’s episodes previously, go check those out. There’s some great shows there, great business leaders, but more to come.
Bill McDermott: [00:46:14] John, thank you so much.
John Ray: [00:46:15] Yeah. Thanks again, Bill, and congratulations. For Bill McDermott, I’m John Ray. Join Bill again for his next episode of Profit Sense.