How to Sell a Business That Won’t Sell

Introduction:

This week, we discuss what we’re calling a We-SOP. The term, coined by Jay Goltz, refers to a business transition that is something of a do-it-yourself ESOP, or employee stock ownership plan, but without the expense and complication and debt of a full ESOP. It’s a transition that lets owners get money out of what has been their life’s work. It’s a transition that lets loyal employees keep their jobs and preserve the company’s culture. And it’s a promising solution for the Silver Tsunami of retiring Baby Boomers because it can provide a sales path even for owners who have never managed to extricate themselves from their day-to-day operations. And in this week’s episode, we take you through an example of how it can work. Jay introduces us to Jill and Paul Choma, co-owners of a business, Gilded Moon Framing, that Jay recently guided through the We-SOP process. As you’ll hear, all three believe that what has worked—at least so far—for Jill and Paul could also work for many other business owners.

— Loren Feldman

Guests:

Jill and Paul Choma are co-owners of Gilded Moon Framing.

Jay Goltz is CEO of The Goltz Group.

Producer:

Jess Thoubboron is founder of Blank Word.

Full Episode Transcript:

Loren Feldman:
Welcome Jill, Paul, and Jay. It’s great to have you here. Jill and Paul, maybe you could start by giving us a quick overview of your framing business. First of all, where is it?

Paul Choma:
So our business is located in upstate New York, about two hours north of Manhattan. We’re in a really affluent area where people have their second homes, and it’s a great place to live. It’s a great place to own a business.

Loren Feldman:
How did you get into the framing business?

Jill Choma:
About 25 years ago, I was a computer software instructor and Paul was a computer programmer analyst. And that was right around Y2K, when things were changing and evolving very quickly, and we felt that we wanted to be in a business that was more stable. And we looked at something where we could be hands-on. And after looking at a couple of different businesses, we settled on picture framing, because we were both involved with building houses. We were both involved with computers. And with that architectural interest, we thought picture framing was the perfect way to blend all of our skills together.

So we started out small in our house. And then we looked kind of all over the East Coast for a place to open up a shop. And we finally settled in a little over 20 years ago into the town that we are in right now. And we started out very small, and we’ve grown the business nicely over the past 20 years. And when we first got started in the business, we happened to read this book called The Street Smart Entrepreneur.

Loren Feldman:
I think I know that book! Who’s it by again?

Paul Choma:
It’s a great book. It’s by Jay Goltz, “133 tough lessons I learned the hard way.” I’m glad Jay learned them, because he taught us, and we avoided a lot of the things that—really, he saved us. He saved us a lot of mistakes.

Loren Feldman:
Tell us a little about building the business. Did it go smoothly? Or did you learn some big lessons along the way?

Paul Choma:
I think we’ve learned a lot of lessons along the way. While we were in the early stages, what area were we going to focus in on? Were we going to try to be a fast frame or one of these places where they turn around work and where it’s inexpensive? You know, Jay had, “Pick two: price, quality, service. You can only pick two.” We really focused on quality, and we really wanted to focus on service. 20 years ago, it was when there were self-checkouts. That was the new thing 20 years ago. And we said: We really want to be focused on service, where we’re going to carry out the artwork to people’s cars, or we’re going to deliver them to their houses. We’re going to make their life as easy as possible. We’re gonna take the pain away. We’re gonna make it easy for them to do business with us.

Jay, in his book, one of the points that he makes is: Have systems in place. So we put in a POS system. Along the way, we revisited the book. He talks about having procedures. We wrote a shop manual, we wrote an employee manual. And as things evolved over time, we started getting more business. We grew the business, and we eventually needed to buy a building. Jay wrote an article, and it said, “Retire a millionaire. Buy a building.” We took that advice. I guess that was probably about 14 years ago, and it’s worked out pretty well for us.

Loren Feldman:
Jay, you always complain that nobody listens to you.

Jay Goltz:
No, no, picture framers listen to me. It’s everyone else. [Laughter] You know, you left one part out. You both have an innate ability to design beautiful framing. You’re doing beautiful, above-average framing. That’s clearly part of the formula here. It’s not just helping them to the car. You embrace doing better framing. That’s clearly part of the formula that worked.

Jill Choma:
When we started growing the business, we realized we had to bring more people onto the team. And we’re a small business. We’re five people, soon to be six. And the other thing that we had to do was learn how to hire people properly. And we definitely made our mistakes along the way. But you need a certain skill-set in this business, where you need to be able to design. You need to understand how to use the computers. And then you also need to understand how to assemble everything, because we do it all right on our site. So it’s a little bit of everything.

And one of the things we did was do some simple interview tests. And those tests have really shown us that if someone is going to be able to use a tape measure, they’re going to be able to use it right off the bat from day one. People who can’t read the measurements, it’s a hard skill to teach someone. So just these little tests to find a good candidate to bring onto our very small team have been important in growing the business as well, having the right people as our team players.

Loren Feldman:
How did you pick the location that you settled on? I assume the demographics that you described had something to do with it.

Paul Choma:
So I taught skiing as a hobby part-time, and I was on a chairlift ride. And a chairlift is a great place to just talk. You’re stuck on a chair for 10 minutes with nothing to do. And I was talking to another coach, and I said, “We’re looking for a small town in New England, where we can open up a framing business.” And he said, “You know, you ought to consider the town that we’re in. It’s called Millerton.” It’s Millerton, New York.

As I said, it’s probably about two hours north of Manhattan. And Millerton had gone through a little bit of a rough patch, probably in the ’70s. In the late ’80s and ’90s, it started to come around. And it was probably within an hour’s drive of where we did live at the time. So we looked into it. I guess we had this conversation on a Saturday. And on Monday, I said, “Jill, this is where we should look.”

I’m the type of person to jump in with both feet and then think about it maybe three days later. Jill, on the other hand, is much more methodical. She drove around the area. She went to different businesses. She did months of marketing research to see if the town that we’re in could support the business that we wanted to develop. And she wrote a whole business plan, came up with a whole strategy, and that’s how we picked Millerton.

Loren Feldman:
Bring us up to date. Can you give us a sense of the size of the business today?

Paul Choma:
Yeah, so as Jill mentioned, we’re a staff of five, soon to be six. We do just under a million dollars worth of business a year. Again, we focus on high-end framing. Our average ticket price is somewhere around $911 per piece. You know, some pieces are $12,000, and we do have the $200 pieces as well. But we really focused on the higher end of framing.

Jay Goltz:
Just for context, that’s a big number. That’s over twice what the average is in the industry, probably. Even mine—mine’s nowhere near that. And I’m selling to a bigger audience, but it’s a higher-end place selling better framing.

Loren Feldman:
And when did you guys start thinking about succession or what you were going to end up doing with the business?

Jill Choma:
Well, I’ve been thinking about it since day one.

Loren Feldman:
You’re the methodical one.

Jill Choma:
Yes! You know, coming from computer-software training, I always thought about training the new owners as we retired. And we have kids that live out on the West Coast. They’re in completely different fields, so they have no interest in taking over the business. So I’d also wanted to retire. I’m in my early 60s. So is Paul. And I had watched my parents, my father in particular, he retired in his 60s, and he had some health issues that kind of took away his freedom to do the things that he loved. So I always felt like I wanted to retire before that could happen to me. So with that in mind, we’ve kind of watched our retirement accounts and things, and we finally just said about a year or two ago, “Okay, we’re really close. Let’s do this. Let’s see if we can figure out our exit plan.”

Paul Choma:
And it just so happened that when we were thinking about this, we were actually on the first day of vacation. And I get a text. I was at a rest area about an hour outside of our business, and I got a text that somebody who’s on this podcast right now was in our shop.

Jay Goltz:
A complete fluke. I have a nephew who got married. His wife is from New York, the wedding happened to be in the middle of nowhere. They said, “Oh, you’ve got to go to this coffee shop.” Okay, so I’m sitting there with my wife at the coffee shop. I look up, and there’s a frame shop, and I recognize the name. And I go, “Wait a second. I know who those people are.” And I walked up there to say hello to them, and they weren’t there. So it was a complete fluke that we ran into each other at that point.

Loren Feldman:
Did you give up your vacation and drive right back to see Jay?

Paul Choma:
No, but we had a conversation. And I said, “Jay, actually, we’re thinking about selling our business.” And we spoke about it a little bit more. Jay suggested that there be an article written in Picture Framing Magazine about us.

Loren Feldman:
The framing industry trade publication, correct?

Jay Goltz:
Yep. And I naively thought, “Oh, we’re gonna do a great article, and the phone’s gonna ring off the hook.” And in fact, we wrote a really nice article with great pictures in it. And, Paul, tells the rest.

Paul Choma:
So we employed a business broker. And here, Jay writes this incredible article about us. And our building, our business, it’s a nice place to walk into. We have an old bank building. It’s about 115 years old, and it’s in really good condition. So here we hand this broker on a silver platter this great description of our business. Jay wrote a strong article about how we’re doing things right. And the broker just really didn’t understand our market, our business model. The broker brought in people that—I don’t know how they screen these people, but they were just…

I’ll give you an example. There was a guy, his name was Ace. I don’t think I need to say anymore. You know, somebody who introduces themselves as Ace, it’s probably not going to work out. It’s probably not going to be a good fit. And we felt like we were spinning our wheels and wasting our time with this business broker.

Loren Feldman:
How did you go about finding the broker?

Paul Choma:
We wanted to find a broker who was not right in the area. We wanted to find a broker who had a broad net. So we brought somebody in from a distance away. We didn’t want to put a big sign out front, “Business for sale,” or, “Turnkey business for sale.” We didn’t want to hurt our business. We didn’t want our customers to jump ship. That’s what we were afraid of.

Loren Feldman:
Or your employees?

Paul Choma:
We didn’t want our employees to jump ship either. And when we first started to talk about selling the business, we knew that two key employees would be a tremendous asset for the new owners. And we would have negotiated that they bring them on and give them a substantial raise. It would only make sense. We wanted to protect the employees the best we could in the negotiation of the sale of the business. And we just felt that it would be best to bring a broker in from a short distance away, but a distance away.

Loren Feldman:
It sounds like you’re both very hands on, very involved. That’s always a challenge for a business owner who’s trying to sell. The more involved you are in the day-to-day, the harder it is to make a sale, to imagine the business without your ownership. Were you conscious of that as you were hiring a broker and thinking about selling?

Jill Choma:
Yes, we were very conscious of that, which is why we really beefed up our procedures and our employee manuals. And we’ve always had procedures in place so that when customers come in, they get a consistent design session. And really, we’re all interchangeable, as far as helping the customers and designing their artwork.

But when we were looking at the broker—we had a couple who we kind of spoke with—and they were recommended to us by word of mouth. And we were very aware that we were the face of the business. And we did everything in our power to have our managers trained so that they could understand how the business, the day-to-day operations, are run, so that Paul and I didn’t have to be the ones running everything. We kind of oversee everything. And we still are involved. We do design work, and we do some of the production work. But for the most part, we were trying to take ourselves out of the day-to-day operations for that reason, so it could potentially be a turnkey business.

Jay Goltz:
Wait, I have to stop both of you. You both use that phrase, “turnkey business.” This is absolutely the opposite of a turnkey business. A turnkey business is any moron could run it. That’s why it’s a turnkey business: a laundromat, maybe an ice cream shop. This takes skill. This takes having the ability to deal with customers. It is not a turnkey business.

Now, if those two people stayed there, and were running it by themselves, okay. But you never know if someone’s going to stay. So that’s really the issue here. And that’s why maybe you got not such a great response, because it’s a difficult business. Am I wrong?

Paul Choma:
No, you’re absolutely right. And Jay, I think this is about the time when I gave you a call, because when we bought the building, we were given a gift. We were given this tremendous opportunity to buy a pretty stately building. As we said, it was an old bank building. It had been a bank for about 115 years, and the branch closed down. And when the building went up for sale, they didn’t want to sell to just anybody. They wanted to sell it to a business that wouldn’t cause their reputation any harm.

And they knew of us. They knew that we had a good reputation. We were literally at a shop across the street, and we were losing our lease. The bank manager knew us very well. She put a good word in, and we got an incredible deal on buying this building. Well, anyway, it didn’t sit right with me that we were going to sell the business and have these two key employees. Maybe they would get a little bit of a bump. But they really stepped up to the plate.

Once the article was out, we let them know. And we told them that they were going to be more valuable once the new owners owned the business. And one of them at one point had said that her goal—we always ask people what their five-year plan is—was to open her own business. That’s what she really wanted to do. And I approached Jay, and I said, “Gee, is there a way? Can you see a way that we can make this happen, where maybe they should buy the business?” They ran it like it was their own. They treated it like it was their own. And if there are two people that really deserve it, they did.

Jay Goltz:
This goes right back to 21 Hats. Because of 21 Hats, because of you introducing me—if you recall, I was totally looking at ESOPs for the whole year that year. I was going to seminars, and it was perfect timing for this situation to come up, because I had just figured some things out about ESOPs that are great. But on the other hand, for a smaller company, the math won’t work.

But beyond that, here’s the revelation I had talking to him: I realized it’s always a great thing if you can sell to your employees. There’s no question. If you can do that, and not lose money, that’s a great thing. And after looking into ESOPs for the last year or so, I realized that when you sell a small business, you usually get—in general, unless you’re a computer business, I don’t think anyone would argue with this—you get three and a half, four times EBITDA, which is very similar to profit. Okay, so, I realized: Boy, if you could just hold on to the company for a couple more years, if you’ve got that luxury, you could get some of your money out just by holding onto it.

Loren Feldman:
I think you need to explain that. You could get some of your money out just by holding onto it.

Jay Goltz:
For instance, if you own a business and you sell it, let’s just say you get four times earnings, okay? Well, if you could get someone to run the business, and you could go on vacation for four years, and keep it going for four more years, you’ve got the earnings. You basically got your money out, I mean, which is why—

Loren Feldman:
It’s like the sale price. You still own it, but you’re not there every day. You get to collect the profit, and that’s the sale price.

Jay Goltz:
The reason I stopped looking into ESOPs is I was never planning on retiring at this point. I was going to maybe sell 30 percent of it, and I finally realized, “Wait a second. All I’m doing is giving the earnings to them to give back to me.” It makes no sense to me, unless you’re leaving. If you’re leaving, a whole different story. I know ESOPs work wonderfully a lot of times. But if you plan on continuing to work, you’re basically just giving the money to your employees to give back to you. It didn’t make any sense. And I had just come to that revelation.

So I said to Paul and Jill, “Can you sell to your employees?” And they said, “We’d love to, but they don’t have any money.” And I looked into an SBA loan, and that’s when the lightbulb clicked on. And I said, “You know what? It’s hard enough to take a civilian and turn them into a business person, like that takes some work. But it’s really hard to take somebody who’s a civilian and turn them into an entrepreneur, because that’s the whole definition of entrepreneurs, is taking risks.”

If they went out and got an SBA loan for hundreds of thousands of dollars—I’ve seen this happen—they’re going to be real nervous. They’re going to go to Thanksgiving dinner. They’re going to tell their Uncle Bob, and Uncle Bob’s gonna go, “Oh, no, you can’t do that. Remember what happened to my friend so and so?” People are gonna freak out. We don’t need to do that.

So that’s when I came up with: I’m calling it a “We-SOP.” It’s very similar. You sell it to the employee, except you stay around for a couple, maybe three years. And you give them a little raise. Maybe you put that money on the side. And then after two or three years, you’ve already gotten most of your money out, like I said, because you’re still getting the profits. And then you can sell it to them. And there’s no bank loan. There’s no SBA loan. No one’s got the risk. And then after two or three years, maybe it doesn’t work for them. Maybe they decided they don’t want to do this. Maybe they got divorced. Maybe their mother left them $300 million dollars. There’s lots of reasons. You’re still okay, because you still own it, and you don’t have any lawsuits. So I proposed that, and they made it work.

Paul Choma:
Yeah, it was genius. It really worked out well for us.

Loren Feldman:
What happened with the broker? How did that end?

Paul Choma:
We terminated the agreement. We had an agreement for, I believe it was a year. We let the agreement expire at the year, and we didn’t renew. We just weren’t happy with them.

Loren Feldman:
Did that expire before or after Jay threw this idea at you?

Paul Choma:
It was at about the same time the expiration date was coming up when Jay proposed this. And so we just let it expire.

Jay Goltz:
Wait, I left that part out. So my article that looked great, read great, great pictures: bupkis! Nothing, nothing.

Loren Feldman:
And in that article, you fully disclosed that this is a business that is up for sale?

Jay Goltz:
Absolutely. You have to remember, the people reading the magazine, they would have to move to upstate New York. It just didn’t work. I thought, “Oh, well, someone’s gonna read this, and they’re gonna think, ‘Oh, my God, this is a great opportunity.’” And like, I don’t have to figure out why it didn’t work. But it didn’t work.

Loren Feldman:
Did you put a price on the business in the article?

Paul Choma:
Yeah, we put the broker’s information in the article. For marketing material, it was the greatest thing. You know, it was a very well-written article. And it was a great marketing tool that they could republish and send out to their list. We just felt that we were on two completely different planets. When the broker, in their marketing material, mentioned, “You can attend a square dance,” where she got that from is beyond me. But we just said: This is not working. This is clearly not working.

Jay Goltz:
Keep in mind, I thought this would work because not only was it a great article in a trade publication, it wasn’t written by a writer. It was written by the guy who owns the largest framing place in the country, who knows what he’s talking about and is saying: This is a great business. I mean, it was a third-party endorsement. So I thought, naively, “There’s 6,000 people reading this magazine, there’s certainly going to be a few that are gonna think, ‘Oh my god, what a great’”—but it didn’t work. For whatever reason.

Loren Feldman:
Were you at all concerned that you were asking too much for the business?

Paul Choma:
No, no. The math clearly works.

Jay Goltz:
They were right in the neighborhood of what businesses sell for. I mean, we weren’t trying to get 10 times earnings or something. It was very reasonable. The fact is, it was a really good deal for someone, if they would have bought the business.

Loren Feldman:
Why was there not more interest?

Jay Goltz:
Oh, I’ve got two overall reasons. One is, somebody would have to move to upstate New York. Okay, maybe they didn’t want to. It was going to picture framers. I don’t know. I mean, the average picture framer is grossing $300,000 a year. They’re making, I don’t know, $50,000 to $100,000. Maybe the best people for this are people who were not in the industry already. I can’t actually explain it all away, because you’d think out of 6,000 people, there’d be three. But there wasn’t.

Loren Feldman:
Well, also, it wasn’t just the people who normally read the trade publication. As I think Paul and Jill said, it was also marketing material for the broker. Presumably, it was shown to a lot of other people.

Jay Goltz:
My guess is they did nothing. My guess is they throw it out in the listings, and they wait for the phone to ring. I have a hard time believing these people really went out there and hustled.

Paul Choma:
Yeah, I think Jay’s right. I think handing this article to somebody—and again, we met with a couple of the people who were interested. And our business would have been destroyed. And we created this business from nothing, from an idea, sitting around the kitchen: “Hey, let’s consider opening up this type of business, a picture-framing business.”

We want to see it thrive long after we own it. A lot of our customers are our friends. We’ve created relationships in the town. We’re really a staple in the town, and we didn’t want to see it destroyed. We wanted to see it thrive long after we’re gone. We still live in this community.

Loren Feldman:
So tell us about the reaction of your two key employees when you threw the We-SOP idea at them. What did they think?

Jill Choma:
They’re very smart young women, and I think it took them slightly by surprise that they hadn’t considered it. But once we kind of laid out a roadmap on what we were thinking and let them have some time to talk amongst themselves—one of them is married, and she spoke with her husband, and his comment was, “This is a gift.” Because we did give them a very attractive price.

When we bought our building, as Paul said, it was a gift to us because it was such a good price. We figured, “Okay, let’s pay it forward. And let’s give these guys a gift.” Because they’re smart, young women. They’re creative, and they’ll be able to take this business and run with it, and take it into the next decade and beyond. So once they spoke about it and came back to us and said, “Yes, we’re interested,” then it became time to really put a plan together. And we worked out a deal with them, where we would hold the note, and they would pay us for the sale of the business. We charged them a fair amount, but it was a lot less than what we were asking through the broker.

Jay Goltz:
Wait, wait, qualify that. Which you could do, because you’re getting the income for the next couple of years. So you didn’t need to get four times earnings. All you needed to get was two times earnings, because you got two more years out of it, and they were running it. That’s the key to the whole thing. You didn’t lose. This was a win-win. If there’s ever been a win-win in the world, this is a win-win. Everybody came out great.

Paul Choma:
Jay, we put so much effort into training and them running a lot of the day-to-day operations. One of the things that we were able to do right from the get-go is Jill has always wanted to travel extensively. We started traveling immediately, and we cut our hours way back. We’re part-time in the business. One of the things that we also have been doing, and we’ll continue to do, right through them taking ownership, is weekly training sessions about not just running the day-to-day operations, but the big picture. We’re teaching them how to be entrepreneurs.

Jay Goltz:
No, no, no, no, no, you’re teaching them how to be business people. Entrepreneurship means they went to the bank and borrowed the money and took the risks. You’re teaching them how to be business people. Big difference.

Loren Feldman:
We need to understand the roadmap that Jill referred to a moment ago, exactly how this unfolded. Because I’m not sure it’s clear how much risk those two employees are taking. How exactly does this work for them?

Paul Choma:
You know, they’re fairly young, and we tried to take some pain away. One of the things in negotiating with them was, we said, “Okay, you’re going to be running the day-to-day operations, and we’re going to start that right away. In exchange for that, we’re going to bring you both up to the same salary. So both of you are going to get a bump.”

So we wanted them to take on more responsibility so that they could earn more money, so that they had money to put into the business, or money to put down on the purchase price of the business. And their risk is really their time invested in learning all the skills required to run a successful business. A lot of it is on their time. So they had some skin in the game. And also, we’re holding the note, but they’re also paying some of the closing costs.

The other thing is, our receivable schedule, whatever money is due, which is pretty substantial, on the day that they close, they have to pay us that money. So jobs, for instance, that are half paid or whatever. That’s some skin in the game. We wanted to make it so that they had a way to own the business.

Jay Goltz:
You used the right word this time. They took more responsibility, yes. Business person. They took more responsibility. But I’m suggesting the amount of risk they’re taking is almost nil. All that time they’re investing, they’re becoming business people. They’re getting better skill-sets. This is almost riskless for them.

Loren Feldman:
Is that because you hold a note, Jill and Paul? They promised to pay you at closing for the business, and you’re anticipating they will be able to pay you that money out of the salary bump that you gave them that they’re saving on the side to pay you?

Paul Choma:
No, no, not at all. That’s how they’re able to come up with part of the money, but we’re holding a note over five years. And there’s an incentive that if they pre-pay or if they make every payment on time, we’ll discount the purchase price.

Jay Goltz:
They’re paying them out of the profits. Yes, they got a bump. But all that profit and the salaries that Paul and Jill have been taking out is all free cash flow. They’re gonna have plenty of profits to pay back the note, probably early. So that’s why I say: This is a great win-win for everybody.

Loren Feldman:
So Jay, just to be clear, when you say they’re not taking risk, it’s because they didn’t borrow money. They’re not ponying up their savings. They’re doing this out of the increased salary and out of the profits that they—

Jay Goltz:
Mostly the profits. The increased salary doesn’t add up to jack. The profit of the company is going to be substantial, and they can pay it back out of that. It’s paying it back through earnings.

Loren Feldman:
And Jill and Paul, I assume you were both taking salaries previously. Did you stop taking those salaries?

Jill Choma:
No, we have not stopped. We have cut back a little bit, but for this time period before the new owners take over, we’re still on salary.

Jay Goltz:
That’s how they’re getting part of the purchase price. That’s the whole idea. They’ve got a couple-of-year runway to continue pulling their salaries out, continue getting profits.

Loren Feldman:
Are those two different things? Or do the salaries represent the profit, pretty much?

Jay Goltz:
It’s theirs either way, whether you call it salary, whether you call it profit. It’s their money. The point being, when they go to actually close, they’ll have already gotten half of their money out of the business.

Loren Feldman:
Here’s why I ask. I’m trying to understand the economics of this business going forward. And if Jill and Paul aren’t working in the day-to-day, but they’re still taking their salary, plus they’re getting the profits of the business, how does that leave money for the two key employees to pay the note eventually?

Jill Choma:
So once they take over the business, we won’t be taking a salary anymore. They’ll just be paying us back over the next five years for the price of the business. And we gave them a very good price on the business. And we also agreed that they’ll have the right of first offer when we’re ready to sell the building. We gave them a five-year lease. And I think it is their goal to take over the building. The building will sell at fair-market value, whatever that is at the time. But in the meantime, while we own the business, we are taking a salary. But once they take over, we will step out. And we’ve worked up a contract where if we do still come back and help them out and work, we’ll become hourly employees after that.

Jay Goltz:
The key is they’re getting half of their money by holding onto the business and its profits for two years. And then they’re getting the other half being paid out, but can easily pay that out of profits and the salary they’re no longer pulling. The question I have, which I haven’t asked you, which I find interesting: So two lawyers got involved. Did that go well? Or did they try to screw it up and make it more complicated than it needed to be?

Paul Choma:
We told them early on, “Listen, lawyers will muck this up. They’ll overcomplicate this.” They’re not family, but they’re very close to family. We said, “Let’s hash out all these details first before we go to the attorneys.” And we also said, “We’ve worked with some attorneys over the years.” Jill and I have bought and sold many houses over the years, and we said, “Attorneys can make a deal go smoothly, or it could be a living hell.” We said, “You have to pick an attorney—and we’ll pick an attorney—where the attorneys are going to be on the same page. If it’s a combative attorney, we don’t want to have anything to do with it, and the deal’s off.”

Jay Goltz:
Because if you get the wrong attorney, they’ll what-if you to death? “Well, what if?” And, yeah, there’s 8 million what-ifs. If you want to totally protect yourself legally, you’ll lock the door on your house and never leave the house. So that’s the way it works. You need an attorney who understands—certainly protect you, but be reasonable with it. So you found the right attorneys and okay, good. Great. So it went smoothly, it sounds.

Loren Feldman:
I take your point, Jay, on the what-ifs. There is one big what-if that I’m sure you all thought about, which is: What if the business doesn’t hold up, it doesn’t do well for whatever reason? They struggle as owners, the economy turns, any number of possibilities. What would happen to this deal if something like that did occur?

Jay Goltz:
I assume you get the business back, right? If they don’t pay the note.

Paul Choma:
Yeah, if they don’t pay the note, there’s clearly very strong language that we just take it back. We don’t want to take it back.

Jay Goltz:
No, no, but I thought about it: So here’s the point of the story. They’ve already got half their money out, okay. And I’m not arguing that couldn’t happen. Okay, they already got half their money out. And now—

Loren Feldman:
After two years, they would already get their money out.

Jay Goltz:
Right. And now, if it’s six months after that, okay, they haven’t got more than that. The worst-case scenario in this is: They got half their money for the business, and they own it again. And now they have to sell it or do a fire sale, whatever. But there’s no perfect anything. I’m not saying this is absolutely for-sure perfect, but boy, this certainly is a good shot at having the perfect thing. You end up with your money out. You end up with two happy employees, happy customers. It’s got the potential, the probability, to work out beautifully.

Could something go wrong here? Let’s give the other scenario. Someone shows up and says, “I will give you X dollars. I’ll give you asking price.” Okay, would they be better off? Well, they’d have the cash, so that’s certainly better off. But it wouldn’t be better off that they didn’t take care of their employees they wanted to take care of. And it certainly didn’t take care of the customers. So there’s no scenario that is perfect. This one has the potential to be perfect, at least. And I just know, from owning my own business, the idea of handing the keys over to a complete stranger and saying, “Okay, here you go”—it’s just, I can’t fathom that. I’m not going to do it. I’d rather give it a shot.

And I’m not at all making judgments on anyone. If somebody needs the money, or they can’t afford to wait, I’m not at all preaching that, “Oh, no, you should always do this.” I’m just saying: If you want to, if you can, what a great option. If you want to, and you can. Some people can’t. They need the money right away. And some people don’t care about their employees. And okay, if that’s how you feel about it, I’m not preaching to them. But you’re right, something could go wrong, clearly.

Paul Choma:
Here is the lead up right now: So they’re running the day-to-day operations. We’re there. We’re a phone call away. Or we’re an email away. But they’re running things right now. They’re running the show while we still own it. They’re learning lots and lots of lessons during this time we’re still available.

And we’re not leaving the planet once we retire. Once they take ownership, we’ll still be there. We want them to thrive. So if they have questions, of course we’re going to answer them. And if they need us to come in, we’ve put in an agreed-upon rate where we can come in. We’re not leaving the state. We live closeby, and we can be there as mentors if we need to. We’ve provided them with tons of training, and we’ll continue to support them in any way we can. I don’t think they’re going to fail. I think this is a great option. And I think they’re going to have many, many years of success.

Jay Goltz:
The other possibility to the what-if: It’s all going fine, except one of them decides, “I’m moving. I don’t want to do this anymore.” The second scenario—which is less bad than the first where things go bad—is, “Okay,” they say, “You know what? We’ve changed our mind. Here’s your business back.” Okay, well, they got half their money out of it already. So, they could sell it for a discount price and still come out fine.

So, there’s great, there’s good, and there’s less than good. Great is everything goes as planned. I think that’s probably what’s going to happen, most likely. Good is they decide they don’t want to do it anymore. They have to go out and sell it again. All right, they should still come out fine. And the worst-case scenario is things don’t go well.

But like I said, there are no guarantees in any of these situations. So the key is, there’s some flexibility to this whole thing. And I can also tell you, if you were thinking about an ESOP, ESOPs cost hundreds of thousands of dollars. That really isn’t an option for a small business owner. You’d have to just do an outright sale to them, which most people can’t do, because they don’t have the money. So hence I called it the We-SOP. You work together with people to make the thing work.

Loren Feldman:
And there are a ton of businesses in this situation. Jill and Paul, I’m sure you’ve thought about this a little bit. I mean, we’ve all heard of the Silver Tsunami. There are lots of businesses that are struggling—the owners are struggling—to figure out what to do with them. Have you thought at all about whether this might be a solution for other businesses in other industries?

Jill Choma:
We have a national trade show. Finally, we had one this year after being held off due to Covid. And what was really nice at that trade show is we met other young business owners that had just purchased their employers’ businesses. So there’s a whole network that our employees can contact and discuss things that maybe come up. And I feel like there’s a lot of help out there in our industry, if they need it. And I think that it is the best situation for us. It’s a great situation for them. And sometimes, you know, what if it all just worked out?

Paul Choma:
Jay was the keynote speaker at the conference. And we introduced them to Jay. They took Jay’s courses. And Jay has been a great mentor to us, over the years. We will mentor them. And, you know, it’s just going to work. I’m skeptical, and I’m not skeptical of this. I’m very confident that they’re going to be successful.

Jay Goltz:
The fact is, many of the businesses that are going up for sale don’t make enough money to sell. Somebody would be basically buying a job. And that’s frequently a problem in the frame business. Trust me, other people have come up to me and would ask me. And I’d say, “How much money do you make?” He says, “60 grand.” I go, “Why would someone pay you $100,000-$200,000 to get a $60,000 job?”

And it’s a problem. You have to make enough money that there’s actually profit left, meaning you paid yourself the market wage, and there’s enough profit left to actually have a business to sell. And that is a problem, not just in picture-framing, but lots of businesses. The owner doesn’t make enough money to sell it.

Loren Feldman:
Is there any reason this couldn’t work in other industries, Jay?

Jay Goltz:
Absolutely not. I think it could work for most businesses, assuming you have competent people who can take it over. If you don’t, that’s another story. But they did. I don’t know if Paul and Jill give themselves enough credit. They hired the right people. They kept them around. They trained them well. And they’re doing a good job running the business. And they managed to get to a critical mass size where they had a business to sell, which is why I was surprised we didn’t get—it was a very viable business to sell to a third party. I don’t think that the broker worked hard.

And maybe the math doesn’t work. Maybe they couldn’t make enough money on this deal to be worth their time to go ahead. That certainly could be the case. Maybe they’re chasing deals that are three, four times the size. I don’t know, I don’t care. All I know is, what a lovely world. Two lovely, hardworking, dedicated employees ended up being able to take over the company and not lose sleep over getting bank pressure and having the money thing. And Paul and Jill get to travel, and you know, business can be beautiful. This is one of those cases.

Loren Feldman:
Jay, could something like this work for your business?

Jay Goltz:
Sure, it’s much bigger. I’ve got 130 employees. I could certainly pick two or three or four of them and do it if it got to that, maybe. That certainly is an option. At the moment, I’m not going anywhere that I know of. But yeah, absolutely.

Like I said, it took me over a year to finally realize that: Here’s a do-it-yourself ESOP. They’ve moved responsibility to the employees, not the risk. That’s the key to this whole thing. They’re now taking more responsibility. But like I said, it’s the difference between making people business people or entrepreneurs. If they were entrepreneurial, they would have gone out and borrowed money somewhere and figured out how to do it. And it would have just added to the whole stress. So that’s why I love this whole thing. Everybody wins. Keep in mind, if you don’t have that key employee, that doesn’t mean you can’t go out and hire someone and look for that person and plan this out. It’s never too late, unless for some reason, you can’t keep working.

Loren Feldman:
All right, my thanks to Jill Choma, Paul Choma, and Jay Goltz, and to our sponsor, the Great Game of Business, which helps businesses use an open-book management system to build healthier companies. You can learn more at greatgame.com. Thanks, everybody.