Veteran entrepreneur Norm Brodsky answers readers questions about retirement, selling a business, and more.
It has been a long time since I've devoted a column to answering your questions, but that hasn't stopped readers from sending me really interesting ones. I figure it's high time I caught up with some of them. So here goes:
My business partner and I started our company in 2001 and have now begun to do some transition planning. We doubt that the company will be acquired, and we don't know if an ESOP is right for us. The most appealing option would be to hire our replacements and eventually move into a consulting and oversight role. We hope to do that over the next 10 years or so. Basically, we're thinking of creating "retirement jobs" for ourselves that will let us dramatically reduce the number of hours we work but retain the ownership of the company. Does this have any chance of succeeding? You described how your five-year life plan took 15 years to achieve. How should we adjust our thinking -- and behavior -- to make this work? -- Timm Moyer
If you and your partner are hoping to hire people like yourselves, I wouldn't waste a lot of time looking for them. A. They probably don't exist. B. If they do, you probably wouldn't want to hire them. Entrepreneurs don't make good employees. What's more, they are often crummy managers, and what you really need is a strong management team. If my experience is any guide, it will take you years to build one, but that shouldn't discourage you. A good management team will make your life easier and your company more valuable. In any case, strong managers will let you lead the kind of life you're looking for. Ten years should be enough time, although that will depend somewhat on your definition of a "retirement job." -- Norm
I am 17 years old and recently sold a website for $100,000. It took me and my partners eight months to build, and we had to overcome many obstacles. And yet, when we finally sold it, I didn't feel excited or elated. Rather, I've been really depressed. I went to a dance with a date last Friday and had a horrible time. It reminded me how out of touch I've been. As I was building the business, I kept thinking, What are you willing to give up to get what you want? I gave up everything. I haven't watched TV in months, and so now I can't talk with friends about the shows they've seen. I gave up piano. I haven't read a good book of fiction in a while. I haven't done sports such as swimming, and I used to be one of the fastest swimmers in the club at my school.
So even though I reached my goal, I am not a happy kid. I've decided I need to quit business -- or at least take a break for a while. I'm planning to study hard and go through school as normal people do. Do you think I'm making the right decision?
-- Hanson So
The question is whether you feel you're making the right decision. I'd guess the answer is a yes. I know what it's like to be consumed by business. You miss out on all the other stuff that makes life worth living. Fortunately, you've learned that lesson at a young age. I was in my mid-40s when I learned it, and by then I'd already missed the childhood of my eldest daughter. So consider yourself lucky. And since, like me, you're obviously very goal oriented, I'd suggest you develop a life plan detailing what you want to be doing in five or 10 years. Think about the kind of life that will make you really happy. Business should help create a happy life, not be a substitute for it. -- Norm
I own an IT consulting business that has been quite successful. Our revenue last year was about $7 million, with net profit of about $750,000. I have been approached by business brokers asking me if I'm willing to sell my company, and a couple of them say they have buyers. They both are asking an upfront fee of about $30,000 to $50,000 to start the process. I do not want to pay that kind of money in advance without knowing where this is heading. What is the best approach to take? Is this the right time to sell, given the state of the economy? I am in no hurry. The company is doing well, with no major problems. -- Gary Sennett
I wouldn't get too excited about these calls. The business brokers are just trolling for business. I used to get calls from brokers who said they had a buyer for a company of mine that had been defunct for 10 years! I'd be very skeptical of any broker who says he or she already has a buyer lined up, and I certainly wouldn't pay an upfront fee. If you want to sell your company, talk to people who've already sold similar businesses and find out whom they used. But no, this isn't a great time to sell. Valuations peaked in August 2007 and have been going down ever since, although I think they may have bottomed out in March. So I would advise you to wait if you can. -- Norm
I have a wonderful opportunity to start a business in New York City. I have the financial aspect under control, but I'll need a couple of people I can rely on. I'd want them to stay as long as possible and share in whatever success we have. I'm thinking about letting them invest with sweat equity. I'd have a one-year waiting period and five-year vesting. At the end of six years, they would own 5 percent of the business. I am also planning to offer above-market salaries, provide health insurance, and match 401(k) contributions. The employees will not have to put up any capital. What would be a fair arrangement, considering that I'm taking the risk? I've been discussing this with a lawyer. What I thought was a simple gesture to inspire two people is turning into something very complicated. What do you advise? -- Eliot Poole
It's a bad idea to offer ownership in a new business to people who are making no investment but their time. You won't really know them until you've worked with them for several years. Of course, the picture changes when people have proved themselves. But even then, remember that it's easy to give away part of your company but really hard to get it back. An above-market salary, health insurance, and 401(k) match should be enough to get someone on board. If not, you might question whether you've found the right person. As for your lawyer, I'm sure he or she is just trying to protect you. That's a lawyer's job, and it often involves making things complicated. If you take out the equity piece, everything will be simpler and go faster. -- Norm
I live in Singapore and just completed my freshman year of college. I am hoping to open an infant-care-services business this summer with my family. The other members of my family feel strongly that we should also do kindergarten, even though there is already very strong competition in that business. My family's strategy would be to copy what the established players do but at a cheaper price. My instinct is to focus on infant care. Kindergarten is not our forte, and the Singapore market is small. I see little point in copying other people. What do you think? -- Sharon Lourdes Paul
I have one overriding rule for everybody who seeks my advice: Always follow your gut instinct about what to do, even if it's different from what I've told you. If you don't and then you fail, you won't take responsibility for the failure, which means it won't provide you with the lessons you need to learn.
As for your family's strategy of getting sales by charging less, I think that's a terrible idea. I would never go that route unless I'd figured out a different business model that allowed me to have substantially lower costs. Charging less probably won't work, particularly in child care; that is, it won't work if you're lucky. If you're unlucky, it will work, and you'll be trapped in a low-margin, commodity-type business. -- Norm
My partner and I have a four-year-old, eco-friendly home accessories company that manufactures organic cotton bedding, pillows, wall art, baby blankets, and the like. As designers running a business, we've had to learn a lot of lessons the hard way. Nevertheless, we've had success in building our brand. In the process, we have put all our own capital into the company, as well as a lot of heart and soul and guts. But we are feeling the full impact of the bad economy and are not able to predict one month to the next. How do you actually know whether or not your business is viable? -- Kristina de Corpo
Your business is viable -- by definition -- if it's able to support itself on its own internally generated cash flow. In times like these, it is natural to worry about survival. But you need to remember that recessions don't last forever. I'm already seeing early signs of a recovery. Just try to avoid making the usual mistakes. Now is not the time to cut back on your marketing or new product development. If possible, I'd increase both. Whatever you do, don't fall into the trap of cutting prices. Offer additional services instead. Your niche will only get stronger as time goes by. Hang in there. -- Norm
Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, was published by Portfolio last fall.