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(Chris Young)
(Chris Young)

Value: John Warrillow

How to sell a firm that depends on you Add to ...

I thought you might be interested in the exchange I had with a reader recently.

Question: “I started a research company 13 years ago after working as an account planner and research director at advertising agencies for more than 15 years. (It was a) one-woman show . . . (and) later my husband joined me. We have worked together for the past decade or so, but kept it a small mom ’n’ pop outfit with the use of fieldwork agencies for support.

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“Now my husband has been offered a job overseas, which he is planning to accept. I don't have the energy to continue all alone (nor the drive) and seriously would consider selling out or turning it over to someone else (an individual or a company) to run, guaranteeing me my income. I really don't have a clue who to approach and how. The business is mainly custom/ad-hoc research and generates revenue of between $500,000 and $800,000 a year. I do have mortgages to pay and cannot just close shop.”

Answer: It sounds as though you and your husband have built an excellent lifestyle business, but because it is relatively small and highly dependent on you, I don’t think it is sellable in a traditional sense.

Under normal circumstances, I would have recommended you try to sell your business to a competitor using an earn-out agreement. Given your size, you would likely get little or no cash up front but would be paid for your business over time based on future goals you achieve as set out by the buyer.

The reason this can be attractive from a financial point of view is you may be able to structure the agreement so that the funds you receive over time from the buyer are treated as capital gains (much lower tax treatment than income). You would also enjoy a steady pay cheque from the buyer, which could continue long after your earn-out agreement is over. You wouldn’t be getting rich, but if your business performed well under its new owners, and most of your clients followed you to the new company, you would at least get some value from your 13 years of work.

However, if you want to accompany your husband overseas immediately, it may be better to negotiate a simple royalty agreement with one or more research companies. Under a royalty agreement, you would be paid a percentage of the gross revenue your partner billed to clients you referred. This royalty could be structured as a one-time fee, but ideally you could negotiate a longer-term arrangement. Perhaps ask for 10 per cent of gross billings in the first year you send a client, and 5 per cent for the following four years.

That way, when clients call, you can place them into the hands of a partner you trust and receive some financial benefit for the client loyalty you’ve built.

Special to The Globe and Mail

John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company. Follow him on Twitter @JohnWarrillow.

Follow on Twitter: @JohnWarrillow

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