By Jeff Sheets
Planning for succession in business is an extremely complicated issue. In some cases, the time for succession has arrived, but there has been a lack of planning for the future because it’s often difficult to accept there will be an ending time for current ownership due to retirement or death. Whether the business is being transferred to relatives, or someone is buying the business and keeping the current owners on staff to help through the transition, it is vital to the continued success of the business to have clear expectations, timelines and a binding contract.
Large companies have to think about this too. For example, GE had a succession process that began in 1994, and after six years, when Jack Welch was about to retire, GE announced that Jeffrey R. Immelt, head of GE’s Medical Systems division, would take over.
Let’s look at five keys to a good succession plan.
#1 Timelines are important
In the transfer-of-ownership scenario, we need the longest timeline possible because identifying and grooming the person or people who will be assuming control will take time. I recently visited a dealership whose manager might be the right person to take over the business. He had great knowledge of sales, inventory and ordering and was good with employees and customers, but he had not been trained on tracking monthly numbers or the financial components. I suggested to the owners that they should start training him now because they hoped to have a person in place in the next five years. That would be a sufficient timeline to put something like this in place. You can’t decide on a succession plan today and think you are turning over the keys of the business to someone tomorrow. The longer the timeline you can give yourself, the better chances your business has for enjoying lasting success.
Let’s say you’re in the scenario where you are buying an OPE business. You’re going to want to have agreements in place to ensure a shorter transition timeline. If it is beneficial to keep key employees from the previous owners to aid in the transition, then there needs to be clear expectations of what their responsibilities will be and when they will transition out of the business. I have seen several dealerships that left this open ended, and they had problems actually extracting the previous key people out of the business. I would suggest a 3- to 6-month renewable timeline that is flexible enough to roll it over if things are going well.
Having the right timeline is important, but actually planning what goes on during this interim period is crucial. We need to look at the process, and go step by step in all aspects of the business to make sure that we have done it well. A first step might be contacting an attorney to work out how the transition could be made legally. Then, contact an accountant to help value the business itself and see how the financials can be reported to make sure it shows how profitable the business really is. Go step by step, making sure all the boxes are checked so that you know you have done your due diligence.
Obviously, if you are buying an OPE dealership, knowing the ins and outs of all the departments is very important. That is why you should keep the previous owners around to gain that knowledge while they are still there. How long will this take? Is it spending a month in the service department and a month in the parts department? It may take longer, but establishing this plan will help you understand the business and be able to transition the old ownership out in a systematic fashion.
The word “planning” is important and cannot be forgotten. As the great President Abraham Lincoln once said, “Give me six hours to chop down a tree, and I will spend the first four sharpening the axe.” Preparation breeds success, and the more we are prepared for the future, the more opportunity we have to make our business outlast us and be something that can be there for generation after generation.
#3 One person needs to have majority ownership
One of the things that I have seen parents do is give their children an equal stake in ownership in a transition. I disagree with this 100 percent. Committees do not run businesses well. In effect, that is what you do when you give equal shares to your children/relatives; you are setting them up for a difficult time. There are going to be tough decisions that need to be made, and sometimes, there can be no agreement. No choice is really a choice, and it can have a detrimental impact on the business. If one person thinks the dealership needs to take on a new product line and the other does not, how is this decision going to be made? It won’t. It will get deferred, and then the next decision and the next decision until no decisions are really being made. If you have two owners, it needs to be at least a 51- to 49-percent split, and with three owners, one at 34 percent and two at 33 percent, and so on.
The same rule applies if you are buying an existing business with a partner. The buck has to stop with one person who has the ultimate authority. Do not think “equal” when it comes to decisions. This is something that should be contractually decided before the ink is dry on buying the business.
Here is great story about the Baskin-Robbins ice cream chain that I found interesting and how they founded their partnership:
When Burton Baskin and Irv Robbins thought about becoming partners in the ice cream business, Robbins’ father said “no,” thinking the concessions each man would make in getting the partnership to work would kill the business opportunities. So, they worked on their own businesses for two years and only then did they combine Robbins’ five stores with Baskin’s three stores under one name that was decided by flipping a coin. Only after being successful at running their separate businesses did the partnership actually work. They each knew what it took to be successful, and only then could they both appreciate each other’s strengths and weaknesses. We just can’t put two or more people together and expect them to function well unless they have been through the wars of being involved in the day-to-day operations of the business.
#4 Make sure you value your business properly
It is well worth paying professional accountants and real-estate brokers to help assess the value of your business. There are many formulas out there to help you make sense of the numbers, but your business in its particular location is unique. I have worked with owners who were very surprised at the value of their land when they had an up-to-date appraisal done on their property. And just like going to a doctor, sometimes a second opinion might be necessary. Experts are great, but sometimes having multiple accountants and advisors weigh in, helps you see a better picture. Don’t be afraid to go out and get another opinion to help you make a solid decision.
Obviously, if you are buying an OPE dealership, this is just as important to you too. You need to know what the value of the inventory, property and cash flow is, so you can pay the right price for the business. Good advisors are important to you too. I also favor talking to other people who have bought a dealership and seeing what they learned through the process. Experience can be a great teacher, especially when it is someone else’s.
#5 Attorneys need to be involved
Succession and transitions shouldn’t be done without legal documents. It is a complicated transaction, and everything needs to be spelled out for everyone’s benefit. I spoke with an attorney before writing this article, and he said the wisest business move is ensuring the succession plan is spelled out well in a written agreement. Do not go online and get a form to fill out. This is too important not to have good, solid legal advice from people who have helped others avoid the problems of bad succession planning.
I am going back to GE’s Jack Welch for a quote on his company’s succession planning. I think it speaks volumes here too. Welch started working at GE in 1960 and became the CEO in 1981. After a few years as CEO, he said: “From now on, choosing my successor is the most important decision I will make. It occupies a considerable amount of thought almost every day.”
This is the type of attitude we need to have if we plan on the business continuing on. Large or small businesses need a succession plan. Please don’t leave it to chance.
Jeff Sheets is the founder and owner of OPE Consulting Services. For the past eight years, Sheets has worked extensively with hundreds of outdoor power equipment dealers to address all of their needs from marketing and inventory management to designing layouts of new facilities and helping rescue businesses that are in trouble, and more. He has a vast amount of experience of bringing “best practices” to OPE dealerships. For more information, he may be contacted at email@example.com or (816) 260-5430. You can also follow him on Twitter @opeconsult and connect with him on LinkedIn.