How to Sell a Business That Won't Sell

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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.

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