Preparing for the Next Generation: Understanding the Importance of Succession Planning
There are business owners who likely look forward to the day when they can hand over the keys to the shop and enjoy their golden years, and then there are those who will likely be at their desk when the end inevitability arrives.
Regardless of which camp you might be in, there is a need to have a plan for what happens to the business after the so-called “end of the line.” Succession planning is crucial to ensure that your employees have a place to go, that your customers who trust the brand can continue to get their vehicles serviced after you aren’t running things and, of course, that your family members are provided for. After a lifetime spent building a business, it should continue on after you can no longer run it. The key is having that plan in place.
No Time Like the Present
The most important facet of succession planning is the actual planning, and this cannot begin soon enough. This is often the biggest problem with independent and franchise businesses alike — planning for succession is put off, and that can present huge problems down the line. As the saying goes: don’t put off until tomorrow what you can do today.
“Who starts thinking about retiring?” said Wayne Rivers, president of the Family Business Institute. “We see so many older business owners who want to die with their boots on so to speak, and too often we’re seeing 80- or even a few 90-year-olds running the business. This is bad because they think they can still run it. This presents a problem for the company, but it is hard to tell Dad that he needs to go.”
Putting off the succession planning — whether it is eventually selling the business or simply handing over the keys to a family member — is a sign that these long-in-the-tooth owners actually might be trying too hard.
“We see some family businesses with older owners that run lean, but actually too lean and they could use a few more people to make it run efficiently,” Rivers said. “There is no bench strength in these companies, and it presents a problem, because if the owner does pass away, it means the shop has lost a bookkeeper, service writer and all too often the brains of the organization. This creates a vacuum that is really hard to fill for the next person.”
To this end, Rivers said you need to think ahead to a day when you won’t be running things, and regardless of how hard you try, this day will come. That said, this shouldn’t be viewed as a bad thing. A well-run shop should be seen as something of pride, a business that is so well run that it doesn’t need the captain at the helm. To make this happen, it comes back to the planning you do ahead of time, and Rivers suggested a 10-year plan at least.
“This is a good, solid and round number that gives you enough time to think about the transition,” he added. “You are going to screw up along the way, and this can help you survive a couple of screw ups.”
As noted, the transition shouldn’t be seen as just one foot in the grave either. Too often this perception is what stops business owners from doing the necessary planning.
“This is one of the key reasons people avoid the topic at all costs,” warned Kendall Rawls, director of business development for the Rawls Group, which helps small business owners with succession planning. “This is a topic that people do associate with retirement and death, but succession planning is about building value and understanding the vision of the business. Why have you invested the time and money into an enterprise and spent your life building it if it can’t go on without you? Succession planning should be part of the growth plan so this effort can be handed down to the family.”
Planning is a must because the alternative is one that no one wants to go through, and that is taking over a business after the owner has actually passed away. Putting off the inevitable too long will ensure that you leave a mess for your loved ones.
“The worst thing in any small business is when the owner dies and his wife is left with a business that she can’t run because she didn’t know anything about it,” said Tom Miller, director of Franchise Sales at Honest-1 Auto Care.
Reaching That Point
Instead of leaving a problem for the family, the first step in succession planning is as simple as actually having the conversation with those close to you. As the owner/operator you should discuss the plans with your family and key staff. One thing that shouldn’t be done is just to assume that your competitor down the road will be automatically interested in buying your business, or making the equally bad assumption someone in your family will want to run it — especially if their current involvement is limited, or worse, non-existent. If your son/daughter doesn’t work in your shop, chances are they won’t want to run it.
Larry Dahl, Oilstop founder and president, has come to terms with some of these facts this year and admitted, “Coming to grips with the realization that I can’t run my company forever is certainly a little unsettling; nonetheless, it is my responsibility to plan for a smooth transition.”
Dahl noted that he has begun the process, and that it is anything but easy.
“We are in the transition process right now, and it is arguably one of the toughest aspects of our business to navigate,” Dahl explained. “Not only does the transition have to involve someone who lives and breathes our corporate culture, but it also has to involve a person or group that knows the nuts and bolts of our business, as well as have the passion and the will to succeed in steering the ship through tough and good times.”
It isn’t easy being on the other end either, and seeing that one’s father is going to have to step down sooner than later. Nick Vuko, Jr., of Walker Tire and Quick Nick’s Service Center, explained that he is dealing with the transition of the business his father spent a lifetime building.
“It was time to have the conversation, and I’ll admit we should have had it earlier,” Vuko noted. “You can’t go backwards. We’re now trying to figure out how to handle it, and it is complicated because it doesn’t involve just the business, but it is the property as well.”
This is a common issue too, as many owners can opt to sell the business yet keep the building and/or property, which can be leased to the new owners. This can lessen the costs to a new owner and allow for a monthly rent check to come in, which can be handy during retirement.
“This can involve hiring a commercial broker, and in some cases it can be better for the taxes too,” said Honest-1 Auto Care’s Miller.
Types of Sales
Generally, the succession of a business is about a sale, even if it is a transfer to the family. In very few cases does the business get handed over to the family, and for those who are in a financial place to give the business away, you should consider whether it is the best option.
“People can be softer when trying to do a family succession in terms of sale, and families can make poor decisions when something is handed to them,” said Family Business Institute’s Rivers.
“We actually would discourage a sale to the family,” Miller added. “Often times the kids didn’t go to college to run an auto service center, and the vast majority of families don’t want the business, so owners shouldn’t assume the family will want it.”
In actuality, family sales are just one of the types of succession that the Rawls Group handles, and these are the rarer of the options out there. In addition to the business being sold or otherwise transferred to a family, Rawls explained that this can also include transferring to a key employee, such as a manager, or more often than not, selling to a third-party. Each of these has its advantages and disadvantages.
Finding an outside owner can take time, which again is why a 10-year-plus plan is a good idea.
“It is never the best assumption that the competition will want to buy your business,” Rawls said. “A competitor will want a business that will be culturally compatible, and they only want it if it fits with their people and culture.”
On the other hand, assuming that your head mechanic or manager will want to buy it is also not a solid plan if this hasn’t been discussed, and this also goes back to the 10-year plan. Even the best paid manager likely isn’t saving to buy a business, especially if he or she has house payments, kids in school and other normal expenses. Few managers have the kind of money necessary to simply pay cash, but in those cases deals can be worked out where the company is essentially financed by the owner — who more or less is the “bank” and sells the business over time to the former employee.
“This is where you can’t get greedy,” Rivers warned. “If you are going to sell to an employee, you need to understand that both parties will want to maintain their lifestyle. This may be great for the guy selling it, but can be rough on the guy buying it. It needs to be a win-win.”
This also means that both parties need to understand the worth of the business, and that is where things can get very complicated. You need to be reasonable, and reasonable shouldn’t be confused with generous or greedy.
“Too many business owners think the business is worth more than it is,” Miller said. “They equate the sweat equity with actual investment and worth, but it isn’t.”
Selling a Franchise vs. a Mom and Pop
Another factor to consider, is whether the shop is part of a national or regional flag versus a truly family-owned shop. This can make a difference in the shop’s worth and how a succession plan is set up. Franchises can carry value simply by being part of a massive chain, but the individually owned business may not have the same value — even if it is well respected by the customers.
“When Joe leaves his shop, there goes a huge portion of the business that can’t be replaced,” Miller added.
Indie mom-and-pop shops might be easier to sell in some ways, as you as the owner can work out a deal with your manager or other interested parties and be paid over time — whereas a franchise could require more official loans, payment schedules and, of course, a lot of paperwork. In both cases, having a broker and/or other planners is key to keeping everyone honest, as they say.
When selling to an outsider, one point to keep in mind is you might not attract someone who has oil running through their veins. With both indie shops and franchises, owners may find interested buyers aren’t necessarily part of the car culture. You need to accept this from the beginning.
“People who are buying automotive shops aren’t necessary car guys,” Miller explained. “These are people who saw that in the last recession many full-service automotive businesses grew. There are only a handful of industries that can ride through a recession, and in these times, there are more old cars with more mileage.”
Buyers can thus come for all sorts of reasons, but the new owner will likely depend on a great manager and staff more than others.
In the case of franchises, Miller said he works with would-be buyers to place them in such shops that are more turnkey with reliable staff.
“A franchisor will help you find someone to help you run it,” he added, “and make sure the manager fits into your business.”
Planning the sale of a franchise should also include keeping the franchisor in the loop, and while this discussion doesn’t need to be 10 years out, it should be soon after.
“As soon as you have a plan, you should discuss it with your regional rep,” Rivers said. “Let them know and keep them updated. Things will change, and the corporate office should understand you have a plan in place.”
Another thing to keep in mind when selling a franchise is the corporate office will almost certainly need to approve the new owner. Miller said rarely does corporate turn someone down without cause, and if the bank has approved the buyer, it is usually a problem-free experience.
“Corporate will do the same checks as a bank, looking at bankruptcy, felonies — the same thing we do when looking at an original franchisee,” Miller noted. “What we are looking for as a franchisor is something better than the owner. Maybe someone who brings more than even the original owner. There are some training programs, but usually a buyer of a franchise can expect to hit the ground running.”
Even in cases where a family member is interested in taking over the business, when it comes to a franchise operation, it will also likely involve the same type of due diligence by corporate. It may be done in a more friendly manner, of course.
“When it is from family member to family member, we look forward to it,” Miller said. “It is a happy day for us, so we make it as easy as humanly possible. We already know the son or daughter, and they are typically working in the business. But the same checks are always going to be done.”
Changing of the Guard
For a business owner with one foot out the door, it is a good idea to help the incoming owner, suggested Christian Brothers Automotive franchisee Chip Fenner. There is a whole check list when buying a shop that owners should understand.
“For current operating businesses, you must have documentation on a number of things, including but not limited to, employee records; [making sure the] employment posters for federal and state are posted; insurance — liability, workers compensation and health; usernames and passwords on all operating systems; and current accounting of all financial information,” Fenner said.
There are also other small items like literally handing over the keys, closing old bank accounts and opening new bank accounts.
“In addition, you need to ensure credit card machines function correctly and deposit to your new account, corporate filing and records, sales tax, unemployment tax, property tax and much more,” he added. “It is very important to sit down with the exiting owner and walk through the processes, issues and administrative operations. During this discussion, you will be able to bring out additional questions and issues that may arise.”
Whether a new owner is a family member, the manager or an outsider, there should be adequate communication during any transition.
“Business owners are required to pivot and adjust quickly to changing environments,” Fenner noted. “Being prepared is necessary to keeping your business operating smoothly all the time. Ask the outgoing owner about potential problems. Get to know other businessmen in that type of business, connected to that type of business such as vendors, and outside that business.”
When Not to Sell
While planning can’t really begin soon enough, one thing to avoid is deciding to sell too early. This can happen from the stress of being one’s own boss.
“Too often people wake up and they’ve had a bad week or an exceptionally bad day and they just want out, right now,” Miller explained. “In those cases, take a minute and breathe. You probably need a vacation instead; even if you have a plan in place, don’t sell quickly because you are just having a bad week. Slow down, think about it and do it correctly.”