Are You and Your Business Prepared for Your Permanent Vacation?

One of greatest advantages of owning a flooring company today is that the need for determining an exit strategy for the owner/s or creating a transition plan to hand over the keys to the next regime is minimal.  Profits are in the teens, property values are at all-time highs, the doors are swinging off the hinges, it is really difficult to keep up with the demand from the builders and commercial contractors, cash flow is awesome, offers to buy the business are streaming in, and the next generation of family can’t wait to take over!! Right?  You and I both wish!  This may have been true up to 2008, but as we all know that bubble has burst and many flooring companies are still getting used to the new norm and have emerged from the ashes with the reality that selling the business or simply handing the keys to the kids is about is about as easy as winning a horse race with a constipated mule with three broken legs.

Eighty-eight percent of current family business owners believe the same family or families will control their business in five years, but succession statistics undermine this belief. Only about 30% of family businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond. The statistics reveal a disconnect between the optimistic belief of today's family business owners and the reality of the failure of family companies to survive through the generations. Research indicates that family business failures can essentially be traced to one factor: an unfortunate lack of family business succession planning.  (Family Business Institute)

 

An increasing trend in the industry is that the next generation has no interest in continuing the family legacy because they witnessed the level of commitment from their parents and value “having a balanced life” more than owning a business.  Now let’s say that there is the interest from the next generation and that they are indeed equipped to assume the reins, these new entrepreneurs face a more complicated world than their parents did, when they founded and built their businesses.  In contrast to publicly owned firms, in which the average CEO tenure is six years, many family businesses have the same leaders for 20 or 25 years, and these extended tenures can increase the difficulties of coping with shifts in technology, business models, and consumer behavior.  Couple these issues with the fact that the founder may still be actively involved, and the job of running a family business becomes monumental for the successor. (Harvard Business Review)

This information is not intended to shock or depress, it is meant to wake up or fire up flooring owners to come to the realization that now, more than ever, having a Succession Plan of when and how to sail off into the sunset is critical and taking the proper steps will minimize the risk of transition failure and increase the likelihood that outside investors will take a sniff. 

Keep in mind that "Succession Planning" is a process, not an event. Even when the formal Succession Plan is in place, it must be a living, breathing and evolving document which is reviewed and updated from time to time to reflect changes in the marketplace, competitive conditions and the health or capabilities of the current leadership.  Building this plan should occur when owners still have enough “gas in the tank” to properly prepare those who will run the business or do their best to instill sustainable systems to make the business attractive to potential buyers.  Waiting until you cannot take it anymore and rushing this process is most likely going to lead to you having to reenter the business at a later date to provide resuscitation or draw less investor interest and/or a lower purchase price. 

 

By no means is this article meant as a “DYI Manual” as it is very important to seek the advice of professionals such as tax planners, accountants, attorneys, and business valuation and transition planning professionals.  Given that disclaimer: outlined below is the simple framework for planning out your eventual exit:

  • Determine your income requirements
    • Figure out what is required to provide the standard of living you have become accustomed. Build an extremely detailed personal budget because once a deal is struck most likely you are stuck.  Do you need a lump sum payout, are you willing to take terms, are you going to continue to earn dividends and/or a salary, are you going to get rental income, etc…?
  • Choose your future role
    • One must figure out what life after transition is going to look like. From a leadership perspective, the business founder must be prepared to "relinquish the helm" without reluctance or regret. A strong message must be sent to the next generation, the employees and the customers that this is a decision the founder made without duress or shame. The outgoing founder may or may not want to have some continuing role in the management of the business in an advisory capacity. Sometimes it is better to make a "clean break" and get the founder refocused on either a relaxing retirement or some commitment to community or charitable activities to stay active and vibrant.

 

 

  • Pick the date
    • The successful transition plan usually involves the founder choosing a fixed departure date (and really sticking to it), having a strong system in place to support the new generation of leadership, resisting the temptation to meddle or interfere, having an alternative exit strategy if, after a reasonable period of time, the new leadership fails, and having activities to pursue after the departure which are rewarding and challenging.
  • Get a professional valuation
    • Estate and succession planning decisions involve complex questions of law, tax and business planning, including the types of property to own, the form of ownership, and, for small business owners, the organization and operation of the business and steps for passing that business to the next generation or potential buyers. The only way to find the plan that's best for you is to work closely with your lawyer and other specialists who can advise you properly.
  • Identify the next generation or potential buyer
    • Be honest with yourself when analyzing the strengths and weaknesses of various family members when considering successors. Try to separate issues of love and fairness from issues of business acumen and strategic management. Many entrepreneurs with family-owned or closely held businesses say the most difficult challenges involve deciding who will succeed the current generation and how to preserve and build the company's value by providing for a smooth transition of ownership and management.  If your family members just don’t cut the muster look at long-term productive employees or competitors that are wanting to increase market share or begin doing business in your market
  • Build a detailed transition plan
    • There are many firms that focus on the family owned sector that can provide assistance with this task. When building this plan milestones must be determined, timeframes established, and required resources outlined.  This plan should not be the best kept secret in the company as there may be multiple internal contributors to the success of this plan.  Keep in mind that if it is documented it must be done!
  • Prepare the successor
    • Invest the time and money to train and educate the "next generation" of leadership - whether the successor is your spouse, children or another family members. If your succession plan calls for a full or partial sale of your business to some or all of your staff, do the same for the employees who will take over. If you are selling to an outside investor is may be necessary to wear the “golden handcuffs” until new regime is fully prepared. 
  • Create a self-reliant business
    • The book value of a flooring business lies in tangible assets, customer base and loyalty, intellectual property and know how, market share, revenue and expenses, and the potential for future earnings.  However, there is no sustainable worth if the only way for the business to retain that wealth is through the daily management of the founder.  Companies are much more attractive, and more sustainable through a transition when built on extraordinary systems that can be run by ordinary people versus ordinary systems run by extraordinary people.

This might all seem like common sense and may even appear to be quite simplistic, but rest assured there will be many twists and turns before an effective outcome is determined.  You owe it to yourself, your family, your employees, your customers, and your legacy to get this right.   With all of the blood, sweat, tears, missed kids’ events, skipped vacations it would be a shame for all of that sacrifice to be for naught.