EP50 - Fast Car - Emotional Issues Related To Selling Your Business To An ESOP.

Good afternoon, everyone. This is the SOP guy. I wanted to start off with with this today, just to say, I know that every one of us is on a different journey in life. But what's really been cool about this podcast is that in the next few moments, we are basically all on this journey to an ESOP together, and I want to say thank you for joining us. And this idea of the podcast has really just been a very uh a great thing for me this year to be able to Uh, be part of and to be able to um spend my time doing because it's really had, I didn't realize this, but it really created, you know, this small community of people that listen to the podcast and some of the people that have joined in interviewing. And it's just been a great pleasure of mine to build, you know, to be part of this kind of community and I want to say thank you for, for being part of the community with us and wanted to, um, if you're not familiar with the podcast and you're just trying it out for the first time, really just welcome you to our podcast. And if you do have an interest in other episodes, please go to our website at journey to an ESOP.com. Today I'm gonna start off with this. Get I want to go to Maybe together we can get somewhere. Any place is better. Starting from 0 got nothing to. Maybe we'll make something I got nothing to prove. So if you recognize that song, um, it is called Fast Car by Tracy Chapman. And I know I kind of gravitate towards the things I really like, and I really like the song. And it's been, it was like in college, I remember listening to that song. It was such a, such a cool um song. I just really like the lyrics. And as I listened to that song recently, I thought, I thought to myself, you know, this song's really about desire. It's about working hard. It's about struggling through life. And it kind of prompted me to start thinking about this episode specifically. And what I'm gonna be talking about is this idea of a selling shareholder when you're sitting there and you're in your eye to eyeball to eyeball talking to somebody that's selling their company. And as an advisor, what we're doing is we're asking questions like, what do you want to get out of this? What are your goals and objectives? How do you, how do you see this kind of happening, what's supposed, you know, ESOP world look like to you as a selling shareholder, because that's fundamentally important to the process. We don't start off with what that's going to look like, we can't really help our clients go through it. But what I realized in all these conversations that I've had with all these different selling shareholders is, is I have as an advisor, have to look past what I think just the business valuation is. And then I have to get in and delve into the emotional valuation of the business, which obviously isn't the same thing as a financial valuation, but it's really important. And so if we, as we do this, as we go into this episode, what we're going to do is peer into the emotional psychology. Behind the business owner going through a potential ESOP sale of their business, really for the purpose of helping to prepare for the sale, and this is what you do as an advisor, you're helping your client prepare for the sale, but helping them prepare to sell or exit their business by planning their emotional response or the potential emotional response to selling their and exiting their business. And I think that is extremely important when you're, when you're going through this process and thinking about it. So, again, when you, if you listen to this episode, if you like what you hear, please subscribe to the podcast. Um, if you think it's worth it, uh, please rate and review the podcast if you're on Apple. I think that's the way you would do it. Um, and then if you know anybody that might be helped, this might be helped by this podcast, please send it to them, um, and share it with a friend and whoever you think might be interested in ESOPs. So, so as we go into this, I want to start, this is kind of different. I want to go into the lyrics of the song because I do, I want to connect the title really well to our topic today. And as I, as I think about this song, um, that, you know, of course, I'm not gonna go through all the lyrics, but um it starts off with, with this. You know, this, this place that, that, that the person in the song, it's all about the story of her life and how things are going and it starts off with, you got a fast car, I want to get to anywhere. Maybe we make a deal, maybe together we can get somewhere. And she goes into this like, wow, what's happening? What do you, what is she talking about? this fast car? and the fast car represents this, this freedom, this sense of freedom, which we're going to talk about. Today, because I think a lot of people, when they have a business, the, the true valuation of the business, the true purpose or, you know, when we're getting down to it, it's not the money. It's the freedom that the business provides to them. And when she talks about the fast car, you're thinking, man, it's just I can, I can just see it, like I can totally see it in the song. And, you know, I got a plan to get us out of here and, you know, I've been working in the convenience store, managed to save just a little bit of money and so you can also also feel The, the grip of struggle in this lady's life and her story. And of course, in the story, She's got, her father's got a problem, you know, drinking and then she ends up marrying somebody that can't get a job and he can't get home to see the kids cause he's in a bar and, you know, but she's got this eternal sense of eternal hope, like she's always gonna be, it's always gonna get better. I hope it'll get better. I always hope for something better, but she, and she's also not just hopeful. She's also, you know, in the descriptions of the lyrics, which again, I just really love, is she's so committed. To working hard and working through all of the, the issues and the struggles of life, you know, specifically in this case, like for her family, but, um, you know, but then deep down inside, there's this emotional thing where she's talking about, I have a feeling that I could be someone, be someone, be someone. And, and what I like about that part of the lyrics is that business owners, when you really kind of try to capture what it is to be a business owner, that they have this vision of what the business can be, and partly that's a projection of, of who they are as a person. And you can almost feel it when you talk to some people that they can see it before it even comes and it's not just about them trying to be somebody in this world, but it's about what they could fulfill in terms of, of, you know, hard work, having a vision, creating a team. And it just makes the kind of idea behind, you know, starting something from scratch, if it's your business that you started from scratch or maybe you took it over from your parents, but you built this in another part of the business and it just, it gives you that sense of, of of emotional investment and the emotional value that's wrapped up in the business. And that's why when I go on to do a business valuation, I'm pretty careful not to like to say, here, here's your number, um, because the number is so much bigger than just the financial number. And so as we start off with that, I wanna, as we tie that idea behind the story of the song into what we're gonna get into, which is the um this idea of the emotional um In energy, the emotional investment of, of the business owner. I wanna start off with The understanding of, of what that might look like. And so for myself, uh, this, this is something that, you know, personally I've had, you know, my own experience cause I'm an owner of a company. And um You know, I had the experience of running the business and we had to go go through and and one of our offices, we had the issue of a very large company coming into the marketplace, and they literally hired up all the employees at this point, you know, we, we're an accounting firm, so they ended up hiring a ton of accountants and the state set up a humongous um operational center in the city that we're doing business. And so overnight, very short period of time, we lost like all of our key people in a specific office. And I just remember that period of time being like, hey, I don't know what we're gonna do. You know, here we have customers and we have a lot of things we got to get done, and we've just suddenly lost, you know, a big chunk of number, a big number of people in our business. I remember going home. And just like literally waking up, you not being able to sleep, staring at the ceiling fan. It's like 3 o'clock in the morning. I remember that those nights, like so many of those nights. And I know that so many business owners have had those kind of nights. You know, from an employee perspective, what's happening, like sometimes, I know some employees get this and I don't, I don't mean to say anything negative about it, but when they look at a business owner, sometimes the employees do not realize. Because they've not had to walk through those kind of sleepless nights, but they don't realize that here comes the the business owner and maybe they're driving a nice car, um, maybe they're going on a lot of trips, you know, maybe they're, you know, they see the business owner, the rewards, but if you look behind all of that, you'll, you'll oftentimes find the hard work that it took for the business owner to get to where they are. So I think the hardest and most difficult aspect of, of as we go into this topic is to quantify the value of a business from an emotional standpoint. And I'm not going to be able to to do that in dollars and cents, but I am going to try to make sure that we capture the concept behind it, so that there's the correct background and the correct context of what it looks like to discuss with a selling shareholder, the possibility of selling their business. And so, I think that as we, as we get into this episode too, it's this concept of I'm, I'm talking, I know I'm talking to business owners in terms of what they're thinking about their business. But I'm also talking to the, the advisors that might be listening and, and the idea is that we as advisors really do need to have a, a, a sincere base understanding of what it's like for these business owners to go into a possible ESOP transaction. Because it's not, it's definitely, it takes time to understand it and make it just is something that is like such a critical um part of their, of their life as it all comes together. And so, in doing that, I wanna start with, you know, as we start to set this kind of concept up with what is the, let's talk about the psychology behind it. And so to do that, I've, I've looked at this article called the Psychological Price of Entrepreneurship. This article was written by Jessica Bruder, published out of a wellness magazine, and it goes into the, the idea behind what you really don't see, but if you're, if you look at how it is for The, the price that a founder or business owner that has founded a company pays is very significant. And this article talks a little bit about the Smiths, and the Smiths have, um, husband and wife team and um co-founded a company has 10 employees, but, you know, they, they're in this place where Their nerves are shot. And he says, my wife and I would share a bottle of $5 wine for dinner and, and just kind of look at each other. We knew we were close to the edge. Then the pressure got worse. The couple learned. That they were expecting their first child. There were sleepless nights, staring at ceilings. I know what that's like. I'd wake up, he says, at 4 in the morning with my mind racing, thinking about this and that, and really not being able to shut it off, wondering when is this thing going to turn. And then after 8 months of constant anxiety, Smith's company finally began making money. So, that's, that's just the reality of it. And I, and I think that was a very good quote from the article only because it is really kind of paints the picture for, for a lot of business owners as they go through that. And sometimes we can remember, we, I absolutely remember those times so well, but we need to be remembering them as we go into the, the, the concept of how we actually look at our businesses from an emotional standpoint. Now, our society, and this is interesting too, because our society really idolizes and makes heroes in our culture out of the Mark Zuckerberg's or the Elon Musk and the famous people that have built these mega businesses that um seem just out beyond us. But the reality is most of the time what we're talking about when business owners, we're talking about people that have started small businesses and they've grown them. And I like the quote that says, Being a business owner is like this, it's like a man riding a lion. People think, hey, this guy's brave. And he's thinking to himself, how the heck did I get on a lion? And how do I keep from getting eaten? And that's what the feeling is like in that sense of anxiety. Hey, this is all gonna catch up to me. I'm juggling a million different balls and, and I think that tries to kind of capture this idea of what's the emotional weightedness of owning my business. Now, from a psychological terminology, what I'm gonna do is introduce this idea because I think it's, it's probably the, it's, it's a bit towards the darker side of the idea of what this could do to a business owner, but it's definitely a real situation. And the terminology is called hypomanic or hypomanic. And the hypomanic episode is an emotional state that's characterized by a distinct period of persistently elevated, expansive or irritable moods. That lasts throughout at least 4 days. And according to the American Psychiatric Association, um, this mood, um, really does present all these unusual mood and, and different fluctuations in their mood. So things like inflated self-esteem or decreased need for sleep. They may be more talkative than usual or um or they just keep talking, they can't stop talking. Um, they might have a flight of ideas, um, Their minds are subject to racing, um, distracted constantly, um, increased, you know, in goal-directed activity. So they're so focused on these certain things, their excessive involvement in certain, you know, areas of, you know, Not so good things in their life. And so these are, these are realities of potential issues that can can come about by the emotional strain of running a business or being this, this involved in to a business. So the article goes on to talk about this idea of hypomanics. And how the US, the United States really has become, in our country, you know, part of it is because we've had all of these different waves of immigration of people coming in, and these people, the immigrants have really an unusual ambition and energy and drive and a risk tolerance. And so there's an aspect of this that's pretty cool because I think part of our country, because our country was built on immigra immigrants, um, it's been very innovative, people have been able to take risk and chances and And, uh, you know, if, if you start thinking about, um, our future country, you know, and, and embracing that concept of immigration, I think this is where there's certain positives, but really then it comes back to this negative issue of, of what can happen to somebody that gets into this higher risk of depression. And what can happen if they do fail is they can really kind of go into a deeper and darker depression and And I'm pointing this out, not to say, hey, this is you, but to show that the impact, the impact of running a business can definitely lead towards some serious negatives when we always kind of put up people on a pedestal, like, you know, Elon Musk and people that have done, you know, that you look at and you say, wow, that's who I want to be, that the cost of getting there is significant and it can definitely take you to a place in life that's very difficult, um, that we don't often, you know, get into. So, let's just say for instance, like the hypomanic thing is just a real extreme. I don't want to get so stuck on that, but I do want to use it to kind of bridge into the idea that it will be an emotional impact to a company or to a business owner that has been doing this for a long time. And this can make the idea of actually exiting your business very difficult. You need to be prepared, you know, as you go through this process to make decisions. And what matters is that, and I point this out because um as the business owner goes into working through the process of transitioning, these things start to kind of come up and we're gonna talk about what these things are and then again how to, how to prepare for them. So, the first thing I really to kind of get our heads around a little bit is, is the concept of, as we as we prepare emotionally to exit our businesses is, is, I kind of think this happens a lot with management transition, so it's not just an exit of a business. So it doesn't really have to be specific to, I'm just gonna transition my ownership and then leave, but it's the transition of your role and responsibility. And, and in that, There's a process of losing control. And the the idea of losing control over what you have built and what you have emotionally invested your time and your energy in is, is a very difficult, it, it can be a very difficult process, and I think it can be Um, uh, an issue that I see across the board where companies, the owners keep pushing and waiting and waiting and in order to do anything with their business because they don't want to even look at this issue. And so, If that doesn't happen, and the, and the question is, is, is, look, you, it's your business. I mean, you can do whatever you want with it. I mean, you could keep doing what you're doing and, and not worry about it. There's gonna have to be some You know, triggering mechanisms. So, you know what, it's time. You know what, I've been doing this for so long and I'm finally ready to, you know, pull the trigger and, you know, move on. And so, um, you know, so if that's you and you're there, then great. But if it's not, and you're still working on, hey, I'm not really ready, I just want to identify this as something that, that could be holding back um the potential. So, You know, with this process of transitioning the day to day operations to say, for instance, to a new management team. can be difficult, um, and because, you know, mostly because it's, it's like, hey, one day you're dealing with everything and you're going to bed thinking about the business and the next day you're like, hey, they don't, they're not even asking me what we should do. They're just making decisions, which is partly, you know, evidence of a successful transition. So the basic question that keeps coming back is, what do you really want to do? Do you want to have more time and freedom from your business? So freedom is gonna come at a cost. And as we talk about freedom, we're gonna talk about why this is so hard in a second, but freedom comes at a cost and that cost is the loss of control of your business. And the original thing that you had. And, and so as that starts to hit you, um, It needs to be, you know, thought through. And, and I, I think this is the part that I think is so important that you, I, I don't think you want to do this overnight. I think you wanna have a, a long term plan of transitioning slowly. I think that's a much more comfortable way to go about dealing with the potential for emotional um issues when you get into, you know, selling or transitioning your business, um, whether you're selling it or not or just transitioning, uh, you know, your team in those roles. So, Um, so definitely looking at doing that over a period of time and it does take, you know, it, it, the optimum time is 5 years. If we can get 5 years going before you transition to your new role, it's great because it can, you can do it slowly and nobody has to, um, you know, you don't have to make some huge changes so quickly. And everybody in the company and your customers and your suppliers, everybody appreciates kind of a slower, gradual uh change. Nobody really likes things that are abrupt. As we plan for these types of things, we're gonna go into some areas that um this is another, another research that we did called Life after an exit, and I, I wanna go into this specific. So, um I'm gonna cover areas that you should be planning for and confront the potential emotional issues for selling, you know, as again, we sell to an ESOP or selling your business to anybody. The reality of selling is a venture again that represents a loss. This loss of control, but it also represents the loss of some identity and community. So what I mean by that is as we've invested emotionally in our companies, it becomes part of really who we think we are. And so that becomes, I would say like an identity that we have. And so when we start being, when we start having our identity taken, Um, taken away from us, it starts to feel really, really bad. And, and so we really need to think about how we plan for that. And so some of this is gonna be about planning for that emotional change of losing, you know, I, you know, quote unquote, your identity, but we get, we're not really losing your identity. It's just what we kind of think, think we are. So this could happen over several stages, as I said, that, that transition should be over a period of time. And if it, if it happens overnight, it could be very difficult. Um, it also kind of ties into this concept that we kind of alluded to earlier, which is that most selling shareholders, as they look at their success, they don't look at, they don't look at just the financial rewards. Obviously, that's important. But rather they really look at the, the success of their business being this place of freedom, and also as an ESOP, like the potential legacy of what they've built. And so, uh, the selling shareholders could often struggle with how to best, you know, transition this freedom of the business to a new freedom. And so sometimes what they'll do in their planning. is they'll say, you know what, I really, I've always wanted to be more involved in philanthropy. I've always wanted to be more involved in this type of, of nonprofit. And so they start planning that into their future. And what that's doing from an emotional standpoint is it's allowing them to start transitioning. That sense and that concept of freedom that they get and the success of their business into the success of other types of ventures. And so they're finding their next fulfilling activity. And I think this is one of the most important parts of the planning is, and I always said, you know, some, some of the other episodes, hey, begin with the end of mind, what do you want to look like, and go backwards, which is a very common thing that's that people talk about through. Um, you know, Stephen Covey and some of the other, um, writings, but it, it, the idea though is I can get myself excited about what that looks like and then that really does start to, you know, help me to deal with the emotional issues related to stepping down and, and in a sense, I guess, losing a freedom that you created by having your own business. So the other thing is we, as we start thinking through the emotional preparation is, is understanding that your, your new identity, if we call it this because we have this identity as business owner and this new identity, um, can be populated with all sorts of things that you haven't had time for. Of course, you know, we want to talk about your family. Of course, we want to talk about your friends and you know, building that, that place with them in this, in this new um new, not a new life, but uh, uh, you know, the extension of your old life into having these new freedoms with them. Um, it says really, you know, one of the things I think is important is find sources of unfiltered input to really gauge where you really are, so that you can get good input. Now, I always think, you know, if you're fortunate enough to have a spouse, This is such a great part of marriage is that my wife will absolutely give me good input and it's unfiltered. Um, and it's really important that I hear it, and it's important that we all listen, you know, to that point because that's gonna be a good gauge of how we've managed through the emotional transition. Having a, you know, a plan towards, you know, your financial security obviously is important, and I think that, you know, it kind of goes without saying, but it has to be mentioned, you're gonna be obviously building out your, your advisory team and they're gonna identify the evaluation and they're gonna identify what your financial situation is gonna look like afterwards. I feel like that's always gonna be important to help, you know, support the emotional side of things. Um, I think the, as entrepreneurs look at, um, becoming successful and the focus and the attention that it took, I think that the, the transition of that into a different life is interesting because That this is where, you know, the business had benefited from the personality of the business owner being so intensely focused and concentrated in driving the business towards its goals and objectives. When you move out of that role, Being um a non-business owner and having like managing your portfolio or whatever you're doing outside of it, it doesn't require that. And so I think there is a transition for people to plan for when you're, you're not needing to be, you know, actively in, you know, intense on things, um. As you were as the business owner, and but I think also if that's your personality, then find something that you are that you like to do and become involved and and take that type of energy into other things. I think that's, that's a key area of advice to say, you know what, um, it's important to do what you like and be and do what you have been gifted at doing. So, you know, as you go through that, um, obviously, the, um, you know, planning is kind of like the repeated kind of concept between this. Um, when you look at the idea of planning your whole thing, I, I think I have to mention this really just important because Um, one of the things that we see when, when people are planning their ESOP transactions. is they really need to do their homework on their advisors, because whatever they do come out in terms of the, the ultimate financial situation. Um, it's really gonna depend on the advisor. So I have to say, please do your due diligence on your advisors. Um, I had done another podcast um recently called, um, regarding ESOP Trustees. It's called To Be or Not to Be an Internal Trustee. But the episode really highlights an ESOP case with all kinds of problems. And so what you don't want to have to worry about is the, is the ESOP coming back to, to haunt you because Hey, you didn't set it up correctly. And, and that comes back to the idea of making sure you've selected your, your advisors correctly. So, so kind of as we finish this idea, I want to kind of get into, you know, just thinking through, you know, having a plan to, you know, reinvent yourself and just a couple of examples, um, when you get out of your business and you're moving on to other things. Um, have a plan in the next 6 months to, you know, to do specific things. So it could be a big trip, it could be, um, coaching a team, it could be getting out, you know, looking at your, your finances, it could be, you know, learning a new language, um, but build a written plan, and I would have that in front of you and just make sure, you know, everybody's different, but I think that's important just to know you're, you're moving into something specific and that really helps, um, again, hopefully get you excited about what's gonna come. I did one ESOP where the guy's plan really wasn't major like this. It was just, hey, I'm gonna go fish more. And, you know, as I check with him every once in a while, he's doing that, and he loves fishing and, and I think that's one of the greatest things when somebody's worked through this whole process and they're really enjoying their life. To finish, I wanted to, I kind of wanted to wrap this up and one of the value points of being an ESOP. That help directly, I think, deal with this emotional um investment that you make in your businesses and the emotional transition that you experience in moving, not only in the management transition side but also the transition of the ownership is the flexibility of an ESOP. And it, it gets talked a lot about, but I want to point out several things that, that the ESOP provides to you in terms of flexibility. First off, we are able to do an ESOP in tranches. So we could do, you know, a small tranche and, you know, 13, 1/3 and 1/3 or something that works for you so that you're phasing into something and you're not immediately making these major transitions. I think that's really important, especially if you look at a 5-year window, and you know you want to be out in 5 years as your exit. But you want to kind of phase out over time and so the tranches give you the ability to still do what you're doing and, and build that management transition plan and deal with the emotional thing, but give yourself 5 years or something like to do that. I, I like the idea of, of your, as you change your role within the company, um, you're changing in this flexibility because you can still be the president as an ESOP. You can still do, you're on the board, you're still very involved and, you know, sometimes the business owners are like, hey, I just want my office. I just want to be able to come into my office and, you know, it's comfortable for them to have a place to go. So, so with the ESOP offers that type of flexibility to give you a role that maybe could be different, but it'll, it, you can kind of really flex that role depending on the way you structure the ESOP. So, as I said before, you're, you're gonna look at partial sales, um, the ESOP also can be um structured with, you know, this, this, um, not just partial sale, but you can also, um, you know, look at the, the installment sales, so you're getting, you know, a seller note out of it. So you're, you're getting paid, you know, as you go through this process and you're still part of the company's, um, you're still much more part of the company's cash flow and their financial side. And so, um, being part of that and, and still being able to be in a seat where you're, you're, um, part of the company, I think is such a, a, a good thing when you start dealing with, you know, or working through the, the management of, you know, what your emotional state is as, as you're going through that. So I I kind of finish up with this, you got a fast car, fast enough so you can drive away. You got to make a decision, leave tonight or live and die this way. Now, I know this is not the intention of Tracy Chapman's song, um, she didn't write a succession planning song, but it does feel like that it's kind of a decision an owner is making based on real emotional terrain. That is thick and it's difficult to comprehend, but as we try and we march out the businesses, I think we have more successful approach to the ESOP. So with all that, please. If you've enjoyed this episode, if you've enjoyed this podcast, subscribe to the podcast, rate and review the podcast. For those that are using in the Apple iPhone, um, if you don't know how to do that, you can always have your kids help you to do the review, um, and I know that because it's hard for me to do that kind of stuff as well. Thank you so much. See you on our next step towards this journey to