How some Twin Cities entrepreneurs sold the businesses they built

Rondo CLT
April 29, 2024
Rondo staff with the Liberated Land Trust Tour delegation
Rondo staff with the Liberated Land Trust Tour delegation

Star Tribune, Jan 8, 2024

When Mychael and Stephanie Wright began considering retirement and the process of handing off their 24-year-old business, Golden Thyme Coffee & Cafe on St. Paul's Selby Avenue, selling it to a land trust organization wasn't on the radar.

"I asked Mychael to really consider and work with Rondo Community Land Trust to not only preserve the legacy of the business, but turn it into something that could be owned by the community at the same time," said Mikeya Griffin, executive director of Rondo Community Land Trust.

After a year and a half of conversations, the parties agreed to a sale. Rondo Community Land Trust — formed 30 years ago to help preserve and create affordable housing in St. Paul — would buy the café and implement a cooperative-ownership model with the Wrights called Golden Thyme Presents. It will act as an incubator for restaurateurs and food vendors who are Black, Indigenous or other people of color.

Whether through a shared ownership, a competitor wanting a larger market share or a bigger company's plan to grow through acquisition, there are plenty of ways to sell your startup or small business. Entrepreneurs in the Twin Cities who've sold their businesses said navigating a deal is much more than handshakes and signing your name on the dotted line. Here's their advice on how to transition your venture into its next phase:

The when and who

Wright said he believes selling his café to the organization will create a resurgence of Black-owned businesses on Selby Avenue.

"I feel it's a way to give aspiring entrepreneurs who may not have that wherewithal to be able to be part owner in a business [a chance]," he said. "I thought that was so intriguing. I'd like to see all of our folks have that opportunity."

Whether it be a worker-owned cooperative, an employee stock ownership plan or an employee-ownership trust, "in times of crisis, but also as economies are in periods of growth, a shared ownership is a tested and proven model that can take communities further together," said Electra Skrzydlewski, director of the Metropolitan Consortium of Community Developers' (MCCD) shared ownership program. The program supports traditional sole proprietors and partnered-ownership structures considering a shared-ownership model.

In Minnesota, not many business owners at retirement age have an exit strategy or succession plan. The state has 53,000 baby boomer-owned small businesses, of which 85% don't have a succession plan, according to a study by the Minnesota Center for Employee Ownership, and Project Equity. In addition to MCCD, University of Minnesota Extension operates online courses about business succession and transition.

For other owners who aren't close to the natural stopping point of retirement, it's a matter of timing.

Jackson Lefebvre started his commercial parking company as a student at the U five years ago, but the responsibilities became too much for a one-person operator after he grew ParkPoolr to 60 parking sites in 20 states.

Lefebvre noticed a growing trend of consolidation transpiring in the parking management industry and decided to look for a buyer. Using his relationships with executives at Parking Management Co. (PMC) — a Nashville-based parking-services provider — he initiated a seven-figure deal and sold his commercial parking startup in October.

He decided against hiring a broker to help orchestrate the deal, especially after being told it would cost $300,000 for the service. But he did have a lawyer review legal documents and the letter of intent from PMC.

"I'm like, 'I can just do this by myself because I already know most people in the parking industry,'" said Lefebvre, who now works in management at PMC. "As long as you put in the time and effort, it was worth it to do it myself and initiate these conversations and gauge interest."

Initiating talks for the sale of your business is tricky, experts said. Over-signaling it's for sale can be a red flag to potential buyers. If an owner wants to test the waters with a few comments here and there, you should do so discreetly. Asking your banker to solicit bids or gauge interest in the market is also an option.

"If you can show your value and understand that you're solving a problem for the acquirer, and you're able to articulate that, it's OK to have those conversations," said Cale Johnston, who in 2021 sold his Minneapolis-based financial technology company ClickSwitch to Q2 Holdings Inc.

Agreeing to terms

E. Coco, deputy director of Rondo Community Land Trust, advocated for clarity on both sides of the negotiation so everyone knows what each is gaining from the sale.

With Golden Thyme, "there was alignment about what the business should continue to do and provide in the community," Coco said. "That's not going to be the same for every business."

For some businesses, it's an all-cash deal or receiving equity in the acquiring company. For others, the buyer pays a certain amount up front with an agreement for residual payments based on reaching financial milestones in the coming years.

The company Johnston started in 2014 developed a technology that provided a simpler way for banks to sign new customers. Q2 Holdings previously offered to buy his company in 2016, but ClickSwitch wasn't ready, Johnston said. Q2 then backed off the deal but revisited the idea in November 2020.

When Q2 Holdings offered the second time, the term sheet was half cash, half stock in Q2, Johnston said. He presented the deal to his board of directors and decided it should be an all-cash sale, and Q2 Holdings agreed.

A fundamental mistake owners make is overforecasting future revenue or inflating the company's value, said Twin Cities entrepreneur Andre L'Heureux, L'Heureux has worked on eight acquisition deals in the past two decades, including the sale of Twin Cities companies ProVation Medical and Carrot Health. Acquiring companies will hold owners to those projections, he said, especially if the deal is tied to residual payments to you.

If a company is too reliant on one customer or contract — or if the bulk of contracts are not multiyear — even if profits appear promising, that business isn't as valuable as one would think to a buyer, L'Heureux said.

"The market is worth what somebody is willing to pay for it," he said. "Not what you think it's worth."

Patience is a virtue

When he signed the second term sheet with Q2 Holdings, Johnston was under the impression the deal would go to close soon after that.

He was wrong.

"The deal almost fell apart six or seven times between signing the term sheet," he said.

Not many experiences can prepare owners for the amount of work required during the diligence period between the initial offer and deal close. Having preparations in place, however, can speed up the process.

Leading up to the sale, owners should be able to provide detailed financial records and legal documentation about the incorporation of the business. They should also make sure contracts with customers and clients are signed and up to date. Same with rent, lease or loan payments to landlords or banks, experts said.

When L'Heureux and his partners sold Carrot Health, because their documentation system was in excellent shape, the diligence process was quick and easy, he said.

Owners should consider doing their own due diligence, L'Heureux said, to make sure the acquiring company is financially healthy and will preserve what you spent years building.

While the process of selling one's business brings validation, euphoria and sometimes even a bit of bittersweetness, owners can't afford to take their foot off the gas "just because someone is interested in your company," Johnston said.

"You still have a business to run," he said. "If the deal falls apart, you still have a company."