Succession Options: There are multiple options for selling your flooring business, and the earlier you get started, the better the outcome – July 2024

By Jennifer Bardoner

With many flooring dealers approaching their mid-60s, succession planning continues to be a topic of interest, and there are multiple options to choose from, notes Bill Gauthier, a succession planning advisor for CCA Global. It’s a phenomenon that is playing out across the industry as the current generation begins considering their options. A somewhat sensitive topic, and one not widely discussed historically, the potential fallout from not having a succession plan has become more evident amid today’s business landscape, where unexpected circumstances have become commonplace. Having an idea of end goals can help set the business owner up for success, not just in their exit but also in their life afterwards, helping them to envision meaningful possibilities outside of their business.

“You don’t want to be selling your company up against some kind of time restriction, be it your age or health, a pandemic, high interest rates, geopolitics hurting the market,” says Steve Woodman, strategic advisor for Lynx Equity’s flooring portfolio. “Bad stuff does happen, as we have seen, so you don’t want to be negotiating a deal with the buyer knowing you’ve got to sell.”

Whether planning to sell the business to any number of potential buyers, establish a co-op or employee stock ownership program (ESOP), or transition it to a family member, the advisors offer these general tips.

• Have a business valuation done. Gauthier reports that about 75% of business owners have their wealth tied up in their enterprise, so it’s critical that they have an accurate and unbiased picture of its worth. Understanding this helps establish realistic expectations for the business’ ultimate handoff, as well as an action plan for the interim. A common mistake Gauthier sees is not understanding how a business is valued and what affects that, along with some of the simple steps an owner can take to enhance that value.

“We certainly look at all the financials, but what sways that is the multiple,” Gauthier explains. “Some things that make the business worth more are value-building activities like SOPs, a vision/mission statement, clear job descriptions and objectives. Can someone step in the business and clearly understand what people do, how they do it, how product runs through the business and how the money flows through?”

• Assess what the owner wants to get out of the handoff. For some, price is the most important aspect; for others, legacy is paramount. By honestly evaluating their goals, owners can strategically plan for the outcome, whether that means making their business more attractive for an outside buyer, grooming their employees to take over, or even getting their own finances in order so they can accept a lower price if need be.

“You have those choices if you’ve planned well,” Gauthier says. “If all of a sudden you have health issues and can’t go back to work, that’s forcing a sale, and your ability to make those right-fit decisions diminishes quite a bit.” 

• Research the transition process. Woodman points out that 60% of all management transitions in the U.S. fail. “There are a lot of people who now can be sources of reference, and I think people are happy to share their experience,” he says. “You should ask their advice, but you still have to filter out what their biases might be and how their goals might be different from yours.”

• Hire professional experts. Gauthier recommends contracting with a business attorney, a CPA and/or a broker who knows your business, a certified financial advisor for personal finances, and a business coach/advisor. Doing this early in the game helps establish trust and a better relationship, and it could open unforeseen doors. For example, an experienced industry broker may know of a potential buyer with whom the seller might not have otherwise connected; a coach might present unconsidered options or considerations; a CPA could recommend unorthodox financial maneuvers for a better-than-anticipated outcome.

• Get personal finances and legal documents in order. A will is a given, but establishing a trust can help smooth the transfer of the business, should the unexpected happen. Additionally, says Woodman, having a comprehensive overview of their finances can help owners establish realistic expectations for the business’s transfer and their lifestyle afterwards.

“If you want 100% of your money at closing, you’re going to get a lower price,” he notes. “If you have some risk tolerance and can afford to not get all your money at closing, stretching some of it out over the following years, you’re going to get a higher price.”

• Let employees know what they can expect. These conversations are perhaps the stickiest point, since many prefer to keep their cards close to their chest until they’re ready to lay them down. “If you have planning time, that’s fine,” Gauthier says. “If you want to sell within two years, it’s time to open up that conversation to a broader audience.

“In the flooring business, we have great people who are dedicated-I don’t often see people leave after the transaction,” he adds. “It doesn’t mean it’s not scary for people, it doesn’t mean they’re guaranteed to stay, but being open and having an honest conversation about what’s going on helps strengthen that.”

This also allows for conversations with key employees about incentives to help retain them. And continuity through a transition helps smooth the process, Woodman says. “Ideally, we like to see continuation of leadership during the transition period-this stabilizes the employees. We’re long term; we want these employees to stay,” he explains.

• Envision a meaningful retirement. Being a business owner can be all-consuming, and it often becomes a large part of the owner’s identity. According to Gauthier, 70% of people who sell their business try to return within six months. 

“It’s what they know, what they do, what their passion is,” he says. “You can only play golf so much. It’s important to have a clear plan for ‘What is my life going to look like? How am I going to plug back into the community?’ Most owners have a lot to give back, but their focus has been on the business. Once they start to envision what life looks like after and what their contribution is going to be, they can start to follow it.”

EXIT PLAN OPTIONS
There are several common options when one is ready to step back from their business: transfer it to a family member, sell it-whether to another individual in the industry, a private equity firm or an aggregator that buys and holds companies-or establish a co-op or ESOP.

Example: Family ownership transfer
Despite growing up playing on carpet rolls in the Colorado flooring store started by her grandfather, Jennifer Curtis pursued other interests after high school, obtaining her bachelor’s in interior design as she weighed whether she wanted to join the family business, which at that point had passed to her father. Just before her 40th birthday in 2023, she was sitting in his office-having ultimately decided to come back-and sharing her trepidation at taking over operations for the full-service store, Right Carpet and Interiors.

It was the last conversation they would ever have.

“He was here on a Tuesday doing daily tasks and work, and at 7:30 the next morning, I got a phone call that he had passed away,” Curtis recalls.

In that final conversation before his unexpected death by heart attack at age 64, her father, Lohn Owens, gave her a key piece of advice: “Always have someone around you who’s smarter than you.”

As fate would have it, two years prior, they had decided to partner with a consultant recommended by their buying group, Alliance Flooring, and had begun working toward Owens’ retirement with the help of Jim Armstrong of Flooring Success Systems. 

“If we were completely blindsided and not had anything in place for the transition, I don’t know how we would’ve moved forward,” Curtis says. “My dad actually got one week of retirement, but that didn’t give my sister Jandi [Phillips] and I good insight into what it was going to take to run this. You think you’ve got it, then you walk in here and the accountant calls and asks you a question you never really thought about answering, or the loan officer calls, and you never knew about all the paperwork included.”

At a relatively small family operation like theirs, everyone wears multiple hats, and the sudden increase in workload and additional tasks has been challenging, especially amid today’s tight labor market. Thankfully, Armstrong had already begun coaching them through a strategic evaluation of everyone’s responsibilities and tasks, and they are currently working to hire two more salespeople.

Meanwhile, Curtis and Phillips have started the legal process of updating the business’s paperwork to preclude another probate situation. When their father passed, the enterprise was solely in his name, which created additional hurdles and could’ve spelled the end for the family’s 47-year-old business.

“It would’ve been nice to have Dad’s guidance, but Jandi and I have done very well collaborating and making decisions together,” Curtis says. “We are probably taking different paths than what we would’ve expected to take, but we’re finding our own way through the chaos.”

She credits her family, many of whom work for the business, for stepping up to help throughout the transition, but she adds, “Without Jim, I can’t say where we would be today. He’s really great at advising what our next step should be.”

Example: Purchase by a buying group member
In 2020, amid the pandemic, Carpet One Floor & Home Asheville owner Ed Israel was approached about buying a fellow member’s store in nearby Hickory, North Carolina. The timing wasn’t great, but the price was, and he wanted the territory. The owner had been trying to sell for a while, and they negotiated a fair price for the business’s assets so she could finally retire, Israel recounts.

With just one semi-retired, part-time employee, the operation was smaller than Israel’s flagship store an hour away. He decided to gut the Hickory showroom and bring in new displays. He then hired a full-time manager and an additional full-time employee. But while business boomed at his Asheville location, the Hickory store struggled, despite its upgrades.

“I was trying to figure out why,” Israel says. “There’s a Lowe’s and a Home Depot about a mile and a half away from us on the same highway, and it’s hard for us to compete with them. Every client that walked in the door had visited Lowe’s or Home Depot and said, ‘They have it for a lower price.’”

Upon realizing the clientele were different than at his Asheville location, which does a lot of high-end business, and that in Hickory, “we can’t get low enough,” in 2022, he decided to transition his Hickory Carpet One to a Floor Trader outlet, a cash-and-carry business that caters to DIYers and tradesmen. While the outcome didn’t necessarily match his plans for the enterprise, Israel sees the purchase as a real win. He’d managed to work out a separate deal with the Hickory location’s property owner after deciding to buy the showroom’s assets. He also owns the property on which his Asheville store sits.

“The business is great to have-we do great business-but my wife’s and my retirement is the real estate,” he notes. “Own your own land if you can.” 

Israel purchased his Asheville Carpet One in 2007, after 17 years of working in the store. The business’s original owner, Lowell Pearlman, had opened the store in 1970, and when he turned 60, he told Israel he was entering his five-year plan to retire, giving Israel time to prepare for the purchase and handoff.

“I felt I was ready-I was always comfortable taking on responsibility and following it through-but it was nice to have a little bit of time,” he says. “And I really needed that time; it was a large purchase for us.”

One of Israel’s longtime friends is an attorney who helped him navigate the sale, and his best friend’s wife is a CPA. Israel also found a commercial banker he could build a relationship with.

“I had those three entities really hold my hand and guide me through the process,” he says. “I think it would’ve taken longer if I didn’t have people I could put my full trust into, because I would’ve been the one reading every word.”

Example: Purchase by an aggregator
Having put 40 years into growing his family’s third-generation Chicago flooring store, Lewis Floor & Home, owner Steve Lewis had hoped to pass it to a fourth generation. When he realized that wasn’t going to pan out, he hired a broker and began entertaining offers from outside parties. Lewis spent several years getting the business in a position where it would be the most marketable. Then the pandemic hit. 

Lewis began considering another route: to sell the property where the store has been located since 1954-which is now a prime parcel near the interstate-and downsize. He was approached by several companies that wanted to buy either the business, the operation and the property, or just the land. Unwilling to shutter the business, Lewis realized that he’d end up paying more for less if he moved, and “we’ve been here for close to 70 years, so there’s clearly an advantage to people knowing where you are,” he says.

After considering offers from private equity companies and talking with financial advisors and individuals who have gone through that process, he also decided that was not the route he wanted to take. Lewis’ broker knew that America’s Floor Source (AFS) was looking to add to its portfolio and thought it could be a good fit overall.

“I was looking for someone who would maintain the brand, maintain the integrity and hopefully grow the brand in a manner that would make me proud, because my name was still going to be on the side of the building,” Lewis says. “AFS checked all those boxes. Whereas my negotiations in prior deals with private equity were more about just dollars and cents, the negotiations with AFS were more about how to grow the business, strengths and weaknesses and retaining people.”

After “an inordinate amount” of research into AFS and its principles and multiple rounds of intense meetings to hammer out all the details, he accepted AFS’ offer in April. While it was less than what Lewis could’ve gotten from a private equity deal, it came with assurances for his staff and even his suppliers, a key point for Lewis. The deal also carved out a more enjoyable role for him for the foreseeable future, allowing Lewis to take some things off his plate while retaining the responsibilities he truly enjoys.

Though it’s been hard to let go of the reins and entrust his business to an outside entity, when he takes a step back and looks at the whole picture, Lewis still believes he made the right choice.

“By negotiating certain things into the deal with AFS, and because they were willing to be a little flexible, I believe we were able to do a deal that benefits everybody,” he says.

Example: Purchase by private equity
After Woodman turned 60, colleagues began asking him when he was going to retire. “I think whenever people start asking you that question, what they’re really saying is, ‘What are your plans, so I know what my plans are?’” he says. “If people are asking that question, you ought to be reading the tea leaves a little bit. When people believe there is instability or lack of planning, good people leave, whether that’s vendors, customers or, most importantly, employees.”

In 2000, Woodman and his business partner Jim Gravalis founded Seattle-based G&W Commercial Flooring. When he reached 60, though Woodman was still in good health, he knew he didn’t want to be dealing with the challenges of a business transfer when he was 70, having read that successful transitions can take ten years.

“We wanted to pick the time,” he says. “We always wanted to sell when business was good because that’s when you get maximum value and considerations. We wanted to be able to say-and we did when we didn’t like something-‘We don’t have to sell.’”

They first considered selling to their employees, but upon meeting with the staff, “it became obvious they didn’t want to take the financial risk,” says Woodman, noting that it could have created a financial risk for him and Gravalis, as well. Neither business partner wanted to buy the other out, and they didn’t see any good options among their competitors, Woodman recounts.

“History tells us those kinds of things don’t really go that well for cultural reasons,” he notes.

Then Woodman got word that a former colleague had sold to Lynx Equity, a private equity firm that operates with a ‘buy, hold’ strategy, keeping purchased businesses intact and operating them in much the same manner as the previous owner. So, he called up his old colleague.

“He said, ‘I’m very happy. I was paid as promised, they did everything they said they were going to do and, most importantly, the employees there are very happy,’” shares Woodman. He then decided to call the employees still at the company, which had been bought several years prior. “They said ‘They’ve been fantastic. We’re doing the strategic things we wanted to do and growing the company, and we’re making great money for ourselves and Lynx.’”

Woodman and his partner signed the sale paperwork in 2017. Immediately afterward, they called an employee meeting and shared the news, though two employees had been involved throughout the sale process.

“I think it’s more constructive when there’s transparency with at least your key employees,” Woodman says. He also notes that giving a buyer access to staff helps assure them of the culture and value. “Since Lynx is ‘buy, hold,’ they want to see great people in the company. They want to see continuity.”

To help with the transition, Woodman stayed on as president until 2022. Since then, he’s helped coach four other flooring company owners through the sales process as a strategic advisor for Lynx, and another is in the works.

“One of the questions I always enjoy is, ‘The day after we’re purchased, will there be a new sign on the door? What’s going to be different?’” he says. “Sorry to disappoint you, but everything will be the same.”

Example: Employee Ownership (ESOP)
Woodsman Kitchens & Floors owner Rick Woods doesn’t view his staff as employees, but as friends. And in his 41 years in the business, he’s amassed a lot of “friends,” many of whom he considers very close. Of the 165 employees at the Jacksonville operation, roughly 40 have been with him for 20 or more years. So, after some preliminary meetings with private equity firms interested in purchasing the business, he decided to instead transfer ownership to Woodsman’s employees through an ESOP. 

“We got some meaningful offers, but early in the conversations, they were honest enough to admit that the goal was to double the company’s revenue in five years and then sell it,” Woods shares. “I felt my employees had given me the best years of their life, and I wasn’t going to do that to them at the cost of whatever was best for me personally.”

With all the unique and detailed legal matters that surround an ESOP, Woods brought on Business Transition Advisors to help him explore the option, though he still personally put in months of research before the paperwork was signed in September.

“Make sure you also have a good estate planning attorney that can guide you,” Woods advises, adding, “Any ESOP participant needs to know that, at some point, they will probably get audited by the Department of Labor. When that happens, you want to make sure you have a very sound, conservative plan that passes muster.”

The model carries financial benefits for all involved, he notes, in addition to the more obvious feel-good ones. Because of the ESOP structure, the company no longer pays federal income tax. Instead, those dollars go straight to the ESOP, whereby the share value increases each year that the company is profitable. Employees are not taxed until they receive the ESOP funds upon their retirement or when they leave the company, and their typical payout is significantly higher than with a traditional 401k, without them having had to invest any money. Additionally, because the employees now have financial skin in the game, so to speak, the business often sees improved revenues through their concerted stewardship.

“The idea is that the employees buy into this, so they care more about eliminating waste and increasing productivity,” says Woods. “If the company is making money, that money is always being funneled back into the company, which raises the share price, and that money is growing every year and growing tax-free.”

He stresses that “there is flexibility to shape the plan so that it makes the most sense for you and the company” in terms of payments, stock options and other key factors. In addition to an initial payment for some of his shares, Woods is receiving monthly interest payments as the company repays the loan taken out to purchase his shares and fund the ESOP. The 69-year-old has also chosen to remain with the company on a regular basis, offering his advice when asked and being a part of Woodsman’s continued success.

“I don’t have enough hobbies to keep me busy,” Woods jokes, adding, “This has been my baby for 41 years, and a lot of close friends are still here working.”

Copyright 2024 Floor Focus 

Related Topics:Carpet One, Armstrong Flooring, RD Weis