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Creating Value: Using Retirement Money to Start a Business

April 10, 2013 by Leave a Comment
Creating Value

Are you getting the most out of your business?

You’re thinking about starting a company. You’ve decided that the best bet is to buy a franchise. This will give you a leg up because someone else has done the heavy lifting and can give you a road map for success. You’ve discussed opening the business with your spouse, and your spouse is supportive. The only problem is that you need to raise $300,000 to get the franchise off the ground.

You’ve gone to friends, family and your local bank, and they have all turned down your request for a loan. But you really want to do this, and you happen to have saved $500,000 in your Individual Retirement Account. You tell the franchise people about your dilemma, and they tell you that for about $5,000, there is a way you can tap your I.R.A. savings to get the start-up capital you need.

Your franchise company introduces you to a promoter of a strategy known as ROBS, which stands for Rollover as Business Start-Ups. But before you can complete the retirement plan transaction, your spouse says, “Wait just a minute. You’re not doing anything till we check this out.”

This scenario, or a close approximation, is something I often see with my clients. I’ll hear about an idea and a client will ask me to look into it. In this case I decided to do the research without being asked because of two You’re the Boss posts that have appeared in the past year.

I first read about ROBS transactions last June in a post by Barbara Taylor. Then last week there were some comments left on a post written by Ami Kassar about business owners who pay too much for financing. My interest in the strategy was piqued, and I decided to look into whether a ROBS transaction makes sense.

It’s a complicated strategy. First, you need to establish a company with a qualified retirement plan. You then move your I.R.A. money to the new plan in your “shell” company, which takes the proceeds and uses them to buy company stock. Now, you have cash to start a business or, in the example above, purchase a franchise.

Whenever I run across a new strategy that involves retirement plans, I look for a pension administrator who deals in complicated pension issues. In this case I spoke with Tim Voigt from Pension Works in Colchester, Vt. Mr. Voigt told me he had heard of the strategy and thought it was likely to be prohibited, either by the Internal Revenue Service, which often takes the lead on issues like this, or the Department of Labor, which also has jurisdiction over retirement plans. Often, one will rule and the other will remain silent. It may mean only that one agency has not yet reached a conclusion.

I also spoke with Jeff Nabers, of Nabers Financial, who specializes in alternative investments for I.R.A.’s and has spent a significant amount of time researching ROBS. Like Mr. Voigt, he said he thinks the Labor Department might prohibit ROBS transactions — based on conversations he has had with officials there. If the department does rule against ROBS, there are significant penalties that could be levied against those who used the financing tool to start a business.

In 2008, the I.R.S. released a memo that referred to ROBS plans as “questionable” and suggested that they might be used to avoid paying taxes. In February, the agency released a ruling that suggested there is a proper way to do a ROBS plan but didn’t quite put the issue to bed. It did not issue regulations for doing ROBS properly. Nor has it released private letter rulings, revenue rulings or safe harbor rulings on ROBS that would remove any doubt about its legality. Because of that and because the Department of Labor has not ruled on the issue, there is still enough risk to consider ROBS a gray area.

Under the circumstances, I don’t believe I would recommend ROBS for one of my clients. Generally, I find that unless there is specific authority granted, it’s best to stay away from innovative tax plans even if they appear to be legal. And it’s always a red flag for me when the only people I can find to defend a strategy are those who are actively promoting it. And so far, I haven’t found independent accountants and tax attorneys offering support. (If you know of any, please tell us in the comment section below.)

But I also have another concern about the strategy — and that’s what happens when a business owner attempts to exit from a company formed this way. I believe the tax exposure on the sale of the business will be extreme, and I’ll talk about that in my next post.

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2013/04/10/using-retirement-money-to-start-a-business/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: , ,

You’re the Boss Blog: Using Retirement Money to Start a Business

April 10, 2013 by Leave a Comment
Creating Value

Are you getting the most out of your business?

You’re thinking about starting a company. You’ve decided that the best bet is to buy a franchise. This will give you a leg up because someone else has done the heavy lifting and can give you a road map for success. You’ve discussed opening the business with your spouse, and your spouse is supportive. The only problem is that you need to raise $300,000 to get the franchise off the ground.

You’ve gone to friends, family and your local bank, and they have all turned down your request for a loan. But you really want to do this, and you happen to have saved $500,000 in your Individual Retirement Account. You tell the franchise people about your dilemma, and they tell you that for about $5,000, there is a way you can tap your I.R.A. savings to get the start-up capital you need.

Your franchise company introduces you to a promoter of a strategy known as ROBS, which stands for Rollover as Business Start-Ups. But before you can complete the retirement plan transaction, your spouse says, “Wait just a minute. You’re not doing anything till we check this out.”

This scenario, or a close approximation, is something I often see with my clients. I’ll hear about an idea and a client will ask me to look into it. In this case I decided to do the research without being asked because of two You’re the Boss posts that have appeared in the past year.

I first read about ROBS transactions last June in a post by Barbara Taylor. Then last week there were some comments left on a post written by Ami Kassar about business owners who pay too much for financing. My interest in the strategy was piqued, and I decided to look into whether a ROBS transaction makes sense.

It’s a complicated strategy. First, you need to establish a company with a qualified retirement plan. You then move your I.R.A. money to the new plan in your “shell” company, which takes the proceeds and uses them to buy company stock. Now, you have cash to start a business or, in the example above, purchase a franchise.

Whenever I run across a new strategy that involves retirement plans, I look for a pension administrator who deals in complicated pension issues. In this case I spoke with Tim Voigt from Pension Works in Colchester, Vt. Mr. Voigt told me he had heard of the strategy and thought it was likely to be prohibited, either by the Internal Revenue Service, which often takes the lead on issues like this, or the Department of Labor, which also has jurisdiction over retirement plans. Often, one will rule and the other will remain silent. It may mean only that one agency has not yet reached a conclusion.

I also spoke with Jeff Nabers, of Nabers Financial, who specializes in alternative investments for I.R.A.’s and has spent a significant amount of time researching ROBS. Like Mr. Voigt, he said he thinks the Labor Department might prohibit ROBS transactions — based on conversations he has had with officials there. If the department does rule against ROBS, there are significant penalties that could be levied against those who used the financing tool to start a business.

In 2008, the I.R.S. released a memo that referred to ROBS plans as “questionable” and suggested that they might be used to avoid paying taxes. In February, the agency released a ruling that suggested there is a proper way to do a ROBS plan but didn’t quite put the issue to bed. It did not issue regulations for doing ROBS properly. Nor has it released private letter rulings, revenue rulings or safe harbor rulings on ROBS that would remove any doubt about its legality. Because of that and because the Department of Labor has not ruled on the issue, there is still enough risk to consider ROBS a gray area.

Under the circumstances, I don’t believe I would recommend ROBS for one of my clients. Generally, I find that unless there is specific authority granted, it’s best to stay away from innovative tax plans even if they appear to be legal. And it’s always a red flag for me when the only people I can find to defend a strategy are those who are actively promoting it. And so far, I haven’t found independent accountants and tax attorneys offering support. (If you know of any, please tell us in the comment section below.)

But I also have another concern about the strategy — and that’s what happens when a business owner attempts to exit from a company formed this way. I believe the tax exposure on the sale of the business will be extreme, and I’ll talk about that in my next post.

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2013/04/10/using-retirement-money-to-start-a-business/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: , ,

You’re the Boss Blog: Selling a Business? It’s the Details That Count

January 10, 2013 by Leave a Comment
Creating Value

Are you getting the most out of your business?

When we last left Holly Hunter, she had sold her business. She had received her down payment but the following payments had stopped after about a year. And it was obvious she had made some mistakes.

While Ms. Hunter’s mistakes are easy to spot in retrospect, it’s also easy to understand how sellers fall into these traps. She was ready to move on. She thought she had a good deal. She was paid about a third of her selling price of $1.4 million in cash and the rest was held as a seller’s note. And for about a year, things went well, at least on the surface.

But there were problems brewing, starting with the new owner’s decision to change the nature of the business. This is hardly an unusual thing. I generally advise selling business owners that they should expect to be disappointed by what the buyer does with the business, and that certainly proved to be the case for Ms. Hunter.

Some of the problems were related to an important hire Ms. Hunter had made before selling. The hire, a certified financial planner, was in tune with Ms. Hunter’s method of operation and investment advice. As time went on, however, this person became more and more disenchanted with the type of service and products being offered by the new owner. The employee felt she was being pushed to sell products that weren’t appropriate for her clients, and she didn’t think the new owner was interested in her concerns.

Eventually, the employee left the firm — and took along most of its staff and clients. This could not have happened had Ms. Hunter retained ownership. She had made sure that her employee signed a covenant promising not to compete, and the agreement made sure that the employee understood that Ms. Hunter’s clients and staff belonged to Ms. Hunter and the firm. There was clear legal language in place stating that both were off limits if the employee were to leave.

When the firm was sold, however, the transfer of the non-compete agreement to the new owner slipped through the cracks. As discussed in previous posts, Ms. Hunter had hired a business broker who did not represent her interests exclusively. We also know that her lawyer was not an expert in mergers and acquisitions. That, combined with Ms. Hunter’s inexperience in business sales, made it easy for this issue to be missed.

From the outside, it looks as if the new owner was not keeping his eye on the ball. It’s pretty hard to lose most of your clients and employees and not know that trouble is afoot. As a result, both he and Ms. Hunter became big losers. With both employees and clients gone, there was no cash left to pay the note that was owed Ms. Hunter. The buyer declared bankruptcy, and there were no assets left for Ms. Hunter to attach. She did try to sue her ex-employee but was informed that the covenant was not transferred and as a result there was no legal remedy.

When you sell a business, it’s often the seemingly small details that become crucial, especially if the seller doesn’t get paid in full and chooses to accept a note or an earnout, which is the promise of future compensation tied to the performance of the business (I’m not a big fan of earnouts!). Ms. Hunter learned these lessons the hard way, losing more than 50 percent of the purchase price through non-payment of her note. She found there was no remedy, only additional legal bills that she would have to pay.

Unfortunately, Ms. Hunter’s story is not unusual. When owners sell their businesses, they routinely enter transactions in which they essentially agree to serve as a bank for the buyer. The new owners get to run the business as they wish, and they rarely are interested in hearing advice from the selling owner. Several months down the road, if things start falling apart, the problems surface when the new owner “forgets” to pay the old owner. Suddenly, it becomes clear that years and years of work are not going to pay off the way the selling owner expected.

Do any of these lessons resonate with you? Have you done anything in your business to make sure that, when it’s time to leave, you manage to protect the value you have spent years building?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2013/01/10/selling-a-business-its-the-details-that-count/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: , ,

You’re the Boss Blog: What It Takes to Crack the Lower Middle Market

November 29, 2012 by Leave a Comment
Creating Value

Are you getting the most out of your business?

When people think about small businesses, they often think about those in what is known as the lower middle market. These businesses typically do more than $5 million a year in sales, and they often have more than 25 employees. It’s good work if you can get it. For one thing, if your business is in this group, you are likely to get regular offers from people who are interested in buying your company.

But a lot of people don’t realize how tough it is to get there. Of the 27 million businesses in the United States, according to the Census Bureau, there are only about 300,000 with more than $5 million in sales. And there are only 150,000 businesses that manage to do more than $10 million in sales. It’s often when a business moves beyond $10 million in sales that a line is crossed: You will either have learned the skills of being a lower middle market business owner or you will fall back to being a traditional small business again.

Actually, there is another possibility. If you take the leap and add overhead to handle the extra sales you are expecting but those sales don’t appear, your business can easily fail. Overhead is easy to add and very difficult to cut.

The lower middle market is where business becomes more complex. To move upstream from a microbusiness requires that you become a manager. Taking the next step to being a middle market business requires that you learn to manage managers. Successful business owners in the lower middle market have learned to work through and with others. The better you can do this, the more successful your business will be.

Hiring is always important, but it becomes even more so in the lower middle market. The owner can no longer be involved in every decision and having the right people in the right places can often make the difference between success and failure.

This issue almost sunk my vending business. In 1995 when I ended my career in the vending and food-service business, we had built our company to four branch operations, 90 employees and about $6 million in sales. That put my business and me solidly in the Lower Middle Market.

But along the way, when we opened our second branch, I made a huge hiring error. The manager I selected was not very good at his job, and I wasn’t very good at managing him. Luckily I had a stable structure in our main branch, which allowed me to fire this manager and take over his responsibilities.

Eventually, I learned that hiring was more science than art. I found that if I followed a system, instead of using my gut, I could improve my hiring efficiency from 30 percent effectiveness to more than 80 percent. I also added systems for delivering service, managing cash and creating new business. This was all part of putting together a dashboard that allowed me to monitor what we were doing.

The real change for me was learning how to manage. I couldn’t do it by brute force. I had to learn to set standards and then to inspect to make sure our standards were being met. My dashboard was part of the solution. The other part was providing face-to-face feedback and learning to hold others accountable.

That required learning to trust and to allow our managers to make mistakes. When we were a small company, mistakes weren’t O.K. They happened, but no one would admit they happened, least of all me. As we grew I had to learn to let others make decisions and then learn from their mistakes. The key was keeping the mistakes small enough that they didn’t sink the business. The better I got at allowing myself and others to learn from their mistakes, the better my company became. And the more I removed myself from day-to-day operations, the more I was able to focus on strategic issues and initiatives.

A nice side effect of this is that cash flow often becomes more predictable. And that allows you to make plans, such as how to expand. As a business becomes more predictable, banks get more interested in you as a customer. This can create a source of financing for growth that may not have been available previously.

The best thing about being a private business owner is that you get to choose what type of business you want. My father has said for years that you are only limited by your ability and your ambition. I think he’s right.

Some owners believe that being a middle market business owner fits their needs. For others, staying a microbusiness is best. If you like the idea of being a traditional small business where growth is not your mantra, you can choose that route. Success isn’t guaranteed, and sometimes events get in the way, but part of successful business ownership is being able to take advantage of good luck and manage bad luck. It’s part of the deal you make when you decide to work for yourself.

Where do you want your business to go? What challenges have you faced along the way?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2012/11/29/what-it-takes-to-crack-the-lower-middle-market/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: , ,

You’re the Boss Blog: 7 Blogs and Newsletters That Can Help You Sell a Business

December 1, 2011 by Leave a Comment

Transaction

Putting a price on business.

In a recent Transaction post, I suggested four questions to ask a business broker. Here is a fifth. Before you hire a business broker, ask something like this: “I’ll bet you’ve seen it all, haven’t you?”

I’ve met advisers who have been helping business owners for 30 years who answer this question with an unqualified “no.” There are too many variables when it comes to selling a business. Every set of circumstances is different, and no one has seen it all. As Rob Slee (see No. 3 below) said in a recent newsletter, there is no teaching, only learning. If you are on a quest for knowledge about when, why and how to leave your business, here are some blogs and newsletters that can help.

1. Best library of articles

The Certified Business Brokers blog is a treasure of information about how to sell your business. Located in Houston, CBB is one of the oldest independent business brokerage firms in the country. The managing partner, Rose Stabler, writes most of the articles and covers a wide range of frequently asked questions, including how long it takes to sell a business and whether a one–time advertising expense should be considered an add-back?

2. Best blog on exit planning

Josh Patrick writes prolifically at the Stage 2 Planning Partners blog about the exit-planning process. Mr. Patrick, a certified financial planner, discusses all manner of exit options — from traditional third-party sales and internal transfers, to lesser-known alternatives like passive ownership. The blog also covers the financial and emotional issues that accompany the decision to leave a business.

3. Most fun to read

I love John Warrillow. As the author of the best-selling Built to Sell: Creating a Business That Can Thrive Without You, his blog and articles in Inc. magazine are informative and delightful. Mr. Warrillow speaks from experience. He built a successful market research firm, sold it, and moved his family to France where he now lives, writes and hatches new business ideas. I hate John Warrillow.

4. Best reality check

No one will buy your business unless it has value. Rob Slee, founder of Midas Nation, will never let you forget this fact in his Midas Notes newsletter. I think of Mr. Slee as the Gordon Ramsay of business. Mr. Slee’s in-your-face style entertains while making you wonder why you’re sitting around reading instead of building long-term value in your company.

5. Best for buying a business

Richard Parker writes the blog at BizQuest. A former business broker, serial entrepreneur and author of the How to Buy a Good Business at a Great Price series, Mr. Parker’s posts offer a real-world perspective on all aspects of buying a business. Even though he focuses on buying, I highly recommend his blog to business owners who are selling. Your chances of closing a successful sale increase if you understand the buyer’s point of view.

6. Best for deal terms strategy

Dave Kauppi writes the Exit Strategist Newsletter. Mr. Kauppi, a seasoned merger-and-acquisition adviser, explains deal minutiae that business owners ignore at their peril, including the dangers of selling a C corporation in an asset sale and why you should care about depreciation recapture. As the saying goes, it’s not what you get, it’s what you keep. Mr. Kauppi will help you understand how deal structure affects after-tax proceeds from a sale.

7. Best for women business owners

Chia-Li Chien (pronounced Jolly Jan) once owned an information technology company and is now a certified financial planner who specializes in working with women business owners. Ms. Chien’s blog and newsletter focus on building strategic value in companies that can be translated into meaningful personal wealth. Her goal with her clients, and her writing, is to help women business owners build businesses that can be sold, whether the owners choose to sell them or not.

Do you know of a blog, newsletter or Web site that belongs on this list? If so, please tell us about it and include a link in the comment section below.

Barbara Taylor is co-owner of a business brokerage firm, Synergy Business Services, in Bentonville, Ark. You can follow her on Twitter.

Article source: http://feeds.nytimes.com/click.phdo?i=c5bbaf8627dad05a5e68069c6c0cce06

Filed Under: Small Business Tagged With: , ,

You’re the Boss Blog: Why I’m (Still) Reluctant to Hire

September 8, 2011 by Leave a Comment

Thinking Entrepreneur

An owner’s dispatches from the front lines.

The August jobs report that came out last week showed no job growth, and now President Obama and lots of other politicians are talking about how to create jobs. But I’m not sure they fully understand what prompts a business owner to hire someone — and why so many owners are still reluctant to hire, even if they think business might be improving.

Jobs are created when businesses get busy enough to need more workers. Businesses get busier when people buy things. People buy things when they need or want them and have enough money. And this is where the problem lies. Many people do not have enough money right now — for all kinds of reasons. Some have seen the value of their homes fall precipitously which may keep them from moving or from improving their house. Moving and improving generates business.

Zero job growth last month does not necessarily mean that business activity has slowed. In some cases, even business owners whose businesses have improved have decided not to hire, but to use overtime, build a backlog, or remain understaffed — even though each of these steps can be painful. Paying overtime costs more money. Delaying shipments or being understaffed can give your competitors an edge. Why would business owners do these things? Because these steps are safer than adding someone to the payroll, and these days safer feels better.

Right now, given the stock market fluctuations, the constant stream of scary news about the economy, and the even scarier politics we see in Washington, business owners are slow to hire new people unless there’s a very strong need. Think about what the owner faces if the business doesn’t materialize to justify the hire — like the horrendous task of laying people off, which scares the staff members who remain and produces a series of other costs. Many of us are just now recovering from our last round of layoffs, both emotionally and financially.

I sell home furnishings, custom picture framing and art. Although all of these industries have been affected, my business has been improving, and I’ve hired a few people this year. But I’m moving slowly. I can tell you one thing that is not going to get me to move faster: a payroll tax break. Why would anyone take on a new employee because of a one-year break on payroll taxes? Some owners might say they would do it — after all, who doesn’t want a tax break? — but the reality is that in most instances the owner would have hired that person anyway. Either you need someone or you don’t. If the government is going to spend money on jobs, I’d rather see it fix the streets and bridges, which really does create jobs (and inject money into the economy) — although whether that’s a good idea right now and whether the politics are plausible is another matter.

To make sense of this, you have to understand why even an owner who sees business improving might be hesitant to hire. Consider this situation:

You interview someone who has been out of work for 11 months. Let’s say he was in his previous job for 20 years, and now he’s regularly being told by job screeners that he is overqualified for the available position. In a good market, this person would not be available. You think it might actually be a good opportunity to bring someone valuable to your company — even though, because of his experience, you will have to pay him more money than you are accustomed to paying. You think it might be worth the shot, but your company is still in a precarious situation after the last few years. What do you have to lose, beyond the salary? Actually, you have quite a lot to lose. In fact, if it doesn’t work out, you could easily end up paying more in unemployment compensation than you do in salary.

If the new hire spends more than 30 working days with you but you have to let him go either because it’s not a good fit or because you were overly optimistic about the economy, he is eligible to collect unemployment. That, at least, is how it works in Illinois; the rules vary by state. Many people don’t realize that the government is not paying the bill for most of that compensation; companies are. The more people a company lays off, the more it pays in unemployment premiums. (I explained how this works in a previous post.)

In the above example, taking a chance on this person could cost a company $20,000 in increased unemployment premiums over the following three years. It makes sense for an employer to pay that kind of money for an employee who has been there for years. I understand and appreciate that unemployment compensation is an important lifeline for people who lose their jobs. But for 30 days? That’s a lot to ask — and it might even be counterproductive. In this environment, it just might be the difference in a decision not to hire someone. Business is about evaluating risks and rewards.

But that’s not all. After you let this employee go, he can go to the Equal Employment Opportunity Commission and file a complaint that he was fired because of his age. You will have to hire a lawyer. His lawyer will call your lawyer to try to settle. You will think, settle for what? For giving someone a chance? You will probably win, but that could take years and thousands of dollars in legal fees. This is why it’s safer — remember, safer is in — to not hire anyone and to continue working with a short staff. Is this good for the unemployed? The economy? The businesses? Anyone?

So what could the government do to encourage hiring? Here are two small suggestions:

First, stop punishing businesses for giving someone a chance. How about giving employers a six-month window before the company becomes liable for someone’s unemployment compensation? How about five months? Or four? But not 30 days. Of course, employees shouldn’t be punished either. If they are already collecting unemployment when they take a job, they should be able to resume collecting it if the job doesn’t work out –- but not at the expense of the business that gave them another chance.

And second, make the E.E.O.C. dismiss frivolous claims quicker. We all know that there are bad bosses doing things that need to be dealt with, but the example I’ve given is not uncommon — and it puts an unnecessary strain on small businesses that don’t have a legal department or even a human resources person for that matter.

This is my short list. Will these steps solve the problem and ignite a storm of hiring? No. But they will create a more hiring-friendly atmosphere while we wait for what we really need — an economy with people ready to spend money.

Jay Goltz owns five small businesses in Chicago.

Article source: http://feeds.nytimes.com/click.phdo?i=fa161c489670eb48b420f4caf954bed5

Filed Under: Small Business Tagged With: , ,

Conversations: Why It’s So Hard for Business Owners to Find an Exit

May 11, 2011 by Leave a Comment

His goal was to find a way to help his company, Beryl — a call center that caters to hospitals and is based near Dallas — keep growing while also allowing him to free up time to pursue other ventures. In January 2010, Mr. Spiegelman signed a letter of intent to sell a majority interest in the company to a private equity firm. But after considering the risks of letting someone else control his company, which has 350 employees and annual revenue of $35 million, he decided to walk away from the deal.

Mr. Spiegelman, who is 53, spoke recently about why he decided not to sell and why succession and exit issues are so difficult for business owners.

Q. How did Beryl get started?

A. I started the company with my two brothers in 1985. But I’m the only one involved now since my youngest brother, Barry, passed away from a brain tumor in 2005 and my other brother, Mark, left the business 11 years ago.

Q. What roles did the three of you play when you started the company?

A. We tried to align our roles with our natural talents. Mark was the technical genius behind everything we did. I was the sales and marketing guy. Barry was the utility guy who helped do everything to bring it all together.

Q. Why did your brother decide to leave the business?

A. Mark had always been a natural entrepreneur. It seemed like every year he wanted to spread his wings and get involved in a different business. In 2000, he decided it was time he did something else. It ended up being the best decision for everyone since up to that time, it was like we had three chefs in the kitchen. Something had to give.

Q. Is your business like other call centers?

A. We made the decision early on that we would never compete on cost. We have taken what is generally thought of as a commodity and turned it into a product with a premium price customers are willing to pay. It has set the bar differently for us.

Q. How so?

A. I think that many companies miss the fact that having a great internal culture where you have engaged employees is not only the right thing to do, it’s also good for business. We have won nine “best places to work” awards and have client-retention and employee-retention rates that are unheard of in the industry. That has also made us four to six times more profitable than a typical call center, which allows us to invest in better tools for our people. It also allowed us to avoid bringing in outside investment as we grew the business. We have had control over our own destiny.

Q. Then why did you decide to explore selling part of the company?

A. There were a couple of reasons. One was that starting in 2009, due to changes in the health care industry, we saw opportunities to accelerate Beryl’s growth. Another was that I had brought on a team of very experienced senior leaders from outside the company who were chomping at the bit to expand and take advantage of the market drivers. Third, I was interested in diversifying my own time to try to help other businesses connect culture with financial performance. For example, I had begun to get involved in something called the Small Giants Community, an international community I helped build around the ideas in Bo Burlingham’s book, “Small Giants: Companies That Choose to Be Great Instead of Big.”

Q. Isn’t there something contradictory about bringing in outside executives and outside investors to help your company grow faster — so that you can help other companies learn the joys of staying small?

A. Being a Small Giant does not mean staying small. All entrepreneurs are growth-driven. Being a Small Giant means that we want to grow for reasons more than just growth and profit.

Q. Part of the goal, I assume, was to take some money off the table.

A. Taking some money off the table was a factor, but it was the least important one. Having built this profitable business, I had been able to build some wealth outside of the business over the years. I had already reached the point where my financial security wasn’t at risk.

Q. So what happened?

A. I signed a letter of intent in January 2010, to take on a major investment by a private equity firm.

Q. Did the investors give you any assurances about how they would run your company and treat your employees?

A. Yes. They did that by validating our belief that there was a connection between the culture we had built and the financial performance of the company.

Q. Then why did you change your mind?

A. Well, as we went through the due diligence process, it began to dawn on me what life would be like to have a financial partner, people who are focused on the short-term view of financial performance. Even though I knew that their plan was to get a return on their investment in four to six years, I began to get nervous. I felt like if we went down this road, it would have an irreversible negative impact on Beryl’s culture.

Q. And you decided to walk away?

A. I did. I pulled the plug about three weeks before we were supposed to close the deal. I know there are cases where entrepreneurs sell their business, get their payday and are happy. But I know there are many more cases where business owners look back and are disappointed with the impact on the culture of their business.

Q. Did you learn anything from the investors?

A. It was great for us to get an outsider’s take on what we needed to do to improve our business, like building an outside sales team, which we have now done. We are making the kinds of investments the private equity firm would have done, but at our own pace, and under our control, which is exciting and fun.

Q. How are you doing it without the additional capital?

A. I decided to fund the growth out of our own working capital, or maybe take on some debt for the first time. It feels like we have reinvented the business by investing in new talent and technology.

Q. But if you didn’t really need outside capital to finance the growth and you didn’t really need to take money off the table and you had already brought in outside leaders to lighten your load, why did you come so close to doing this?

A. That’s like asking me why I had the ice cream if I didn’t really need it. As entrepreneurs, we are going through constant business phases and a search for the right thing to do. Sometimes we make good decisions and sometimes we don’t.

Q. Are you now considering other succession plans?

A. I’ve begun to look at the possibility of an employee stock ownership plan. I never thought this was a company my kids, who are 5 and 9, would run. But now sometimes I think, maybe they could.

Article source: http://feeds.nytimes.com/click.phdo?i=c08d2e6fe1995b2a5ca0fb9fc6059527

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