Latest / The SmallBizChat with Melinda Emerson / How to Transition to Employee Ownership with Sarah Durham

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How to Transition to Employee Ownership with Sarah Durham · The SmallBizChat with Melinda Emerson

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  I think a lot of people, you know, just make it through the day to day and think about exiting
• 0:05
  when they have a reason to think about exiting.
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  Unfortunately, when the heat is turned on and it's really you're feeling the pressure to
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  exit, sometimes that's kinda late in the game.
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  To to start to do the kinds of things you need to do to exit on your own terms.
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  So so my advice is start thinking about it as soon as you have the capacity to do so.
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  1010
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  ignition.
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  Lift off.
• 0:33
  Ending small business failure.
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  Welcome to the small biz chat podcast with the number one small biz expert, Melinda Emerson.
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  Melinda's goal is to end small business failure, and she'll give you the information
• 0:48
  you need to succeed and live life you dream of.
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  Now here's your host, the small Biz chat lady herself, Melinda Emerson.
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  Hi everyone.
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  I'm Melinda Emerson, the small biz lady, America's number one small business expert, and
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  I'm excited to welcome you to another edition of the small biz chat podcast.
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  We have an amazing show in store for you today.
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  If you are thinking about exit planning from your business.
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  I have an amazing expert here who's gonna talk to you about how she transitioned out of her
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  business.
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  And it's probably not what you would think.
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  Now if you're ready to start planning your business transition, whether you're gonna sell
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  your business or something else, I have an expert who's really gonna give us some insight
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  into how to thoughtfully exit from your business in a way that is financially lucrative
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  and also beneficial to your employees.
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  Now here on the small bridge step podcast, our mission is to end small business failure.
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  We are a peer to peer mentoring show, and we bring in expert from different angles to give
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  you advice.
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  And the goal is always to help you take your business to the next level.
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  Now the small biz chat podcast can be seen on my small biz lady Facebook page and it can also
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  be seen on my small business lady YouTube channel.
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  So if you're watching us, please leave a comment please subscribe to my channel and, of
• 2:19
  course, share it with others so that other people can get the benefit of all of this
• 2:24
  expertise that right now you do not have to pay for.
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  So with that, I am so excited to introduce today's guest.
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  Sarah Durham, and she is an entrepreneur and creative consultant with a passion for helping
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  entrepreneurs.
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  She founded Big Duck in 1994 to help nonprofits increase their visibility, raise money, and
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  communicate more effectively.
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  And now she serves on its boards of directors after selling the business to her employees in
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  2021.
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  Sarah now provides coaching to entrepreneurs, nonprofit leaders, and women in leadership
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  roles through her firm Compton Durham.
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  For more information, you can go to compton Durham.com.
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  Sarah, welcome to the small Bishop podcast.
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  Hi, Melinda.
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  Thanks for having me here.
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  It's a pleasure.
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  So tell us about your entrepreneurial journey.
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  Like me, you started your business when you were pretty young.
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  I did.
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  And perhaps like a lot of your listeners, I started my business a little bit by accident.
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  I was a a creative freelancer, and I on opportunity to turn a couple of freelance
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  clients into, studio clients, and I began a business in the mid 90s And for the 1st 5 or 6
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  years, I would say the business really ran me, and then I made a decision to try to kind of,
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  educate myself, kind of give myself an MBA, start to work with consultants, really GoPro.
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  And I grew the business over many years, And my job got smaller and smaller as I built a high
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  performance team.
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  Probably 25 years into running my agency.
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  I actually bought a second agency, a digital business, that was a partner agency that was
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  kind of failing.
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  And I ran both those businesses in parallel.
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  And then last year, as you mentioned, I sold big duct to my employees.
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  It became a worker owned cooperative.
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  That was something that was in the works for many years, and I sold the digital agency to a
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  peer agency.
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  So I I sold it to a larger agency, And now as you mentioned, I, I'm running my 3rd business
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  where I, I work as an executive coach, which I love because I get to be the, the pit crew or
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  the support team for the next generation of leaders?
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  So you said a whole lot there.
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  So let's talk about how you transition your business to your employees.
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  So what I mean, explain that to us because I would when I learned that about you, I was
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  like, oh, no.
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  I wanna know the details about how you did this, how long did it take you, you know, how
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  long did you plan before you did it, and how hard was it even to do?
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  Yeah.
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  Well, the, the conversation about exiting my company actually started 10 or 11 years before
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  it happened.
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  It happened.
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  For me, the way it happens for a lot of entrepreneurs when I had to sign a long lease
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  on a big office space.
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  And, and at that point, I thought, well, at the end of this lease, there's a chance that I will
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  be ready to transition.
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  I'll be in my early fifties.
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  I'll be empty nest If I'm ever gonna do anything else professionally, that may be when
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  I want to do it.
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  And so I kind of very gently began a conversation with a couple of people on my
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  company's leadership team about that, about, you know, how the business might transition if
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  I was, and my goal was to sell the company.
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  So, we have these kind of quiet conversations for a while, but what really sparked the move
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  towards employee ownership and becoming a coop was at the beginning of the COVID lockdown when
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  that when the world just required us as leaders collectively to innovate and to look for new
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  solutions to new challenges.
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  And what I saw in my team was an amazing group of people rising to that challenge who had the
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  the mojo to solve the problems that the company needed solved in 2019, 2020.
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  And, and myself feeling like, you know what?
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  Maybe it's time for me to step aside.
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  Maybe it's time to let the next generation lead.
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  How do we do that?
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  And so we started doing a bunch of research.
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  It turns out there is a very, very helpful national campaign about employee ownership
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  called EO Equals, and, through some research we did and through some talking to talking to some
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  people, we started thinking about me selling the business to my employees, and we started
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  looking at some of the, the options to do that.
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  And we entered into a feasibility exercise, we found that it was possible for us, and so
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  probably from start to finish once we identified that we wanted to become a worker
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  owned cooperative.
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  It took about a year And at that point, I exited the company.
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  And, and the people who had been working in the company for a while continued to run the
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  company today as worker owners.
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  So you exited the company, but, like, how many employees did you have at this point?
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  Like, how big of a company did you have?
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  I think at the time we transitioned to become a co op, we were about 15.
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  So becoming a co op is a really great option for a lot of smaller companies, there, there
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  are 3 types of employee ownership.
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  There's ESOPs or employee stock ownership plans, and those are great.
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  A lot of people know about ESOPS.
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  But ESOPs are qualified retirement plans, and they are recommended for bigger companies,
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  companies with 40 or 50 employees, or, you know, a lot of a lot more revenue.
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  There are a lot of great tax benefits in them, but they're complicated.
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  For smaller companies, worker owned cooperatives are a great option because they're
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  super flexible.
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  And one of the things that was very motivating to me and my team was the ability in a work
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  grown co op to share both the equity and the governance of the of the company.
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  The 3rd option are employee ownership trusts or EOTs, which combines a trust with aspects of a
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  worker cooperative, but we might co op because it really was the most aligned with our our
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  values and the strength of our team.
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  So okay.
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  So it took you a year to do this.
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  What kind of experts, lawyers, like, like, who who how did, you know, who did you have to have
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  to do this?
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  Cause I I'm still very intrigued by this.
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  So I I really wanna understand What kind of team did you have to put in place to actually
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  make the transition out?
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  Yeah.
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  So we were very lucky when we went through this because we had an excellent consultant called
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  the ICA group who helped us navigate the process.
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  They specialize.
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  They're a nonprofit and they specialize in helping small businesses go through the
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  feasibility, and then the operational steps to become a worker owned coop.
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  And, and there part of the EO equals campaign I mentioned earlier.
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  Of course, we had accountants and lawyers.
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  I mean, when I compare the the, the business that I sold to my employees as a coop to the
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  business I sold to another agency, there were accountants and lawyers in the room for both of
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  those deals a lot, but with the co op, we actually elected to have one lawyer that we
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  shared between me and the co op.
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  Again, an attempt to really just make it as equitable as possible and as and to reduce the
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  contentiousness of the deal.
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  So you were just able to, like, through your through the EO equals campaign.
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  That's how you found your consultants, or did you, like, were you doing an internet search
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  and found them?
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  Like, how did you found the people?
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  It was a combination of things.
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  Actually, one of the things we at, at the very beginning, I said to my employees, the, a
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  couple of people on the leadership team, if I wanted to sell this business to you, would you
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  be interested in buying it personally if I wanted to sell this to, another agency?
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  How would feel about working for the owns at all structure really felt right with the values
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  of the of the company.
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  So we started talking to other businesses that had done things like that.
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  Businesses we knew that had become Esops or coops, and we started looking for consultants.
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  So we basically went on a fact finding mission, and that really helped us not necessarily
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  decide what we wanted to do, but narrow the playing field.
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  I mean, it, it's interesting.
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  That part is very hard, and now in my work as a coach, I do a lot coaching with entrepreneurs
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  around understanding their options because I think a lot of entrepreneurs really don't
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  understand what's out there and don't understand the difference between what happens
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  to your business if you sell it to a big agency or a big, you know, or small competitor or your
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  employees, etcetera.
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  So That part is a little bit murky for a lot of people, but, but you just do your homework and
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  hopefully you find the find the solution.
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  But isn't it also the case that, like, 8 out of 10 businesses might think they could sell and
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  they can't because the business still far to rely on the owner?
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  Yes.
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  Yes.
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  I I think that I I don't know if that's the exact number.
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  It could well be the the vast majority of businesses are not salable.
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  I got a piece of advice from a consultant very early on in my business, which I found helpful,
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  and it's a it's something I try to instill in my work with the people I coach to, which is
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  the idea of running and growing your business with the idea of it being saleable.
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  That doesn't mean you will sell it.
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  It means that you have the attributes that make it potentially salable.
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  And one of those attributes is certainly that it cannot be wholly reliant on one person.
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  There are lots of other things that it needs to have, I think, to be Salable, but for me, the
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  that that's set forth.
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  I mean, I'm I made that decision, I don't know, 15, 20 years ago to try to run my my business
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  so that it could be salable because I figured that's an efficient well run business.
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  And if I ended up just shutting the doors and walking away, it couldn't hurt.
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  So, I think it's a good practice.
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  I think it is too.
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  So what was hard about it?
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  Right?
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  So you you've talked glowingly about what happened in the end, but I need the deets.
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  Right?
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  So tell me what was hard about transitioning out of this business that you had run for 25
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  years.
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  In this way.
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  Yeah.
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  Well, I'm sure you and and the people watching and listening to this can relate to the fact
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  that, you know, any business that you found and run for a long it's kind of like a child, you
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  know, you have ideas about what you want it to be or become, you may or may not be right about
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  those ideas.
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  It's gotta it's gotta go on its own journey.
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  As we were transitioning to a place where I was separating from the business and we were kind
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  of working out the tales of the deal.
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  I really had to practice letting go not chiming in on decisions.
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  I used to chime in on moving towards a backseat coaching role, you know, which I had kind of
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  been doing for years, but but I really had to stop being central to conversations in order to
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  make space for my colleagues to practice, you know, stepping into those, those decisions The
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  other thing that was I think very challenging in the last few months before we did the deal
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  was that we did have to negotiate against each other to some extent.
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  We had to iron out how we extracted me from the company, and it had been my company for 28
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  years.
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  So there's a little tension in that I think we navigated it well in the end.
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  And then of course for the the people who now own the business, the the worker owners of the
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  business, there was this kind of flying the plane, you know, while you're rebuilding it
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  from the inside out because as a co op, the co op has has new values, new structures, new new
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  things that might wanna innovate without me in the room.
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  So maintaining the company and keeping what has been strong about it in the past, but still
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  reinventing it, I think, has been, part of the challenge for for the the team in this 1st
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  year.
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  Was transitioning to employee ownership lucrative?
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  Or did you, like, take a big haircut to do it?
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  I mean, like, how did you how you know, was it was it financially a good was it like a
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  windfall?
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  Like, did you did you feel like I did this for 28 years?
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  I'm leaving and I got a big old first, a full of money with me as I walk out the I mean,
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  like, how did it work?
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  Yeah.
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  So so if you've ever structured a deal.
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  There are lots of ways to value a company and there are lots of ways to structure a deal.
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  I didn't take a haircut.
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  You know, the business was valued, and in any evaluation, there's usually a range, and I sold
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  the company to my employees for within that range.
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  There are actually banks that help finance these kinds of deals specifically to promote
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  employee ownership.
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  And so we were able to get financing for the deal So I received a certain amount of cash at
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  closing, and then I haven't earn out over many years.
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  So, if I had sold the business perhaps to a big holding company or some, you know, hedge fund
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  or equity firm or something like that.
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  Could I have made more money perhaps, but that would have been, I think, very misaligned with
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  the goals of my employees and and the values of the company.
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  So I feel very happy with the outcome all around.
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  Well, I think that's a good answer.
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  So, Sarah, what advice would you give a business owner who is thinking about and, you
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  know, her their transition out of their business.
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  How early should you start, you know, thinking about it and planning it before you're actually
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  gonna do it?
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  I mean, ideally, I would follow Stephen Covey's advice in in his writing.
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  He talks about beginning with the end in mind and and right now in my coaching, I have
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  several clients who are new businesses, businesses, one that's a year old, one that's
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  about three years old, where they're actually right now anticipating the way they want to
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  exit so that they can build and grow their business for the eventual exit that they want.
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  With that said, I think a lot of people, you know, just make it through the day to day and
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  think about exiting when they have a reason to think about exiting.
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  Unfortunately, when the heat is turned on and it's really, you're feeling the pressure to
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  exit, sometimes that's kinda late in the game.
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  To to start to do the kinds of things you need to do to exit on your own terms.
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  So so my advice is start thinking about it as soon as you have the capacity to do so.
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  So I know that you sold your your first business to your employees, your other business
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  you sold to another agency What was that personal transition like for you?
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  It's one thing for you to kinda transition out of day to day.
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  But what was it like, like, the day after you woke up?
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  And you had given the keys to them.
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  Right?
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  And you were like, okay.
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  Who am I today if I'm not up worried about this business?
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  I mean, like, did you Did you go through, I don't wanna call it some kind of depression or
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  something, but did you go through a, like, okay, what am I gonna you know, like, who am I
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  if I'm not worried about this business every day?
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  Did you go through that?
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  I have to say, in all honesty, not not for a minute.
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  I've been I've been very, very happy and very, sad slide in the decision, and I actually did
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  expect to go through some amount of grieving or transition.
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  You hear a lot of stories about entrepreneurs who sell their businesses and then, you know,
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  buy them back or regret that decision.
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  That has not been the case for me, and I think it's because I had for so long thought about
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  exiting and had for so long thought about what are the sort of fundamental building blocks of
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  a meaningful career for me.
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  And I think one one of the things we haven't talked about that was intrinsic to my decision,
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  and I think is the reason I felt good, is that, you know, I had had like you you know, nearly 3
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  decades of being the leader, the person at the head of the table.
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  I was really ready to not be that anymore.
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  I want to be the, you know, the support for the next generation, and it just feels great to be
• 18:28
  able to do that now.
• 18:30
  Definitely.
• 18:31
  I I I can completely agree with you about that.
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  So what would you say in in all of this transitioning that you've done.
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  What is the best advice anyone has ever given you in business?
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  Not necessarily about your exit, but just in general, like, what was just a really good
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  advice somebody gave you that you realized, like, over all these years, you're like, you
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  know, that was excellent advice that someone gave me.
• 18:59
  You know, I think a lot of people early in my career gave me the advice to really be myself
• 19:06
  and find my authentic voice as a leader, my own style as a leader, And I think those words made
• 19:14
  a lot of sense, but it wasn't until I actually kind of had that moment of like, oh, this is
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  who I am.
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  As an entrepreneur.
• 19:21
  This is who I am as a boss.
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  This is why I'm different from you or you or you or you that I really started to feel
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  empowered to run my business in a way that aligned more truly with my values my goals in
• 19:37
  life, my identity, and, and that was really what the rocket fuel was.
• 19:40
  So, you know, be yourself.
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  That's That's how best
• 19:43
  you can be.
• 19:44
  Did you finally get that self self comfort to do that, though?
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  I mean, probably 10 years in, 15 years in, took a while.
• 19:54
  I think that's a fair statement because I can actually say the exact same thing.
• 19:58
  I think you you start a business when you're in your twenties and you're like, I'm supposed to
• 20:03
  know everything.
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  And then you finally get to a point where you're like, nobody could know everything.
• 20:07
  Why do I think that?
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  Why did I put all that pressure on myself?
• 20:10
  You know, so I I definitely agree with you that you have to come full circle with your own
• 20:15
  confidence in yourself and and being confident enough to say, I don't know the answer.
• 20:19
  I think it is a is a really watershed moment for a lot of young young entrepreneurs.
• 20:25
  Well, Sarah, I have enjoyed learning about you and your story so much I just wanted to share
• 20:32
  that story because I think a lot of people don't think about exiting until maybe some real
• 20:38
  tragedy happens and they have to think about it in a very urgent way.
• 20:42
  And I think thinking about exiting from your business in a more thoughtful way, earlier on 3
• 20:48
  years, 5 years ahead of time is a much better, much, much better way to do it.
• 20:53
  So thank you so much for the advice that you shared.
• 20:57
  I just wanted to thank you for being here today.
• 21:00
  This has been an amazing show.
• 21:02
  Thank you to my guest, executive coach Sarah Durham, check out her website, comtendurm.com,
• 21:08
  and thank you all for joining me for this episode of the small biz chat podcast.
• 21:12
  If you're working on your digital marketing skills, be sure to check out Small Business
• 21:16
  University for the month of November.
• 21:19
  All of my online marketing courses or 50% off.
• 21:24
  All you have to do is use my code SBL 50.
• 21:28
  And all of my courses are 50% off.
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  And I never do this, so y'all better get on it.
• 21:32
  Okay.
• 21:33
  Now the mission of the small bitch chat podcast is to end small business failure.
• 21:38
  I'm Melinda Emerson, your host.
• 21:40
  And I will leave you with this.
• 21:41
  You never lose in business.
• 21:43
  Either you win or you learn.
• 21:45
  God bless everybody.
• 21:49
  Thanks for listening to the Small Biz chat podcast with Melinda Emerson.
• 21:53
  Subscribe to this podcast wherever you listen to podcasts and join us next Wednesday for more
• 21:59
  fantastic information and interviews.
• 22:02
  You can find more sources and small business success strategies by visiting Melinda's
• 22:06
  website succeed as your own boss dot com.
• 22:09
  Thanks again for listening, and we'll see you next week.