Succession Planning: Early succession planning to de-risk a business benefits leaders and their teams – July 2023

By Jessica Chevalier

While succession planning is often viewed as a task for a business owner to tackle as they reach the end of their leadership days, it is actually an exercise that should begin when leadership forms or buys a business and continues through its entire lifecycle. Good succession planning enables a business to handle unexpected events, retain and reassure staff, and establish itself as an entity separate from the owner.

Geoff Gordon, CEO of Fuse, believes that one of the greatest misses for a business owner is conflating succession planning with exit strategy and waiting until they are ready to hand over the keys before putting a blueprint in place. “Succession planning is a plan for passing leadership on to one or more employees if the top leader can’t perform,” he explains. “Part of that could be liquidity or an exit strategy; those are two separate things that can be tied together. The biggest challenge with small-business owners is that they don’t want to think about succession because it is tied to mortality. What we say is that for a successful company to continue to grow, there has to be a clear strategy so that employees know they have a future.”

He adds, “Lack of communication makes people nervous. If the owner won’t discuss their exit strategy, most people assume there isn’t one.”

Gordon suggests that business owners think of succession planning like they think of life insurance. And an important part of that is having a “second” trained and ready to take charge if the business leader becomes ill, is called out of town unexpectedly or has an extended hospital stay.

For small businesses, this may look like one or more individuals being cross-trained to do the job for which they were hired and take the reins of leadership should they be called to step up unexpectedly.

CCA Global’s Bill Gauthier, director of training and consulting, likes to say, “Succession planning is business planning,” to drive home the importance of the practice to CCA members. “There are a lot of benefits to starting early,” he says. “When you buy a franchise, you have to have a succession plan in place before you even open doors. We don’t require that, but we hate to see it as an ‘uh-oh’ at the very end. We want our members to build for continued success.”

He adds, “I have worked with folks in their 30s and 40s who have pursued succession planning as a means of de-risking a business. As a business owner, if I die unexpectedly, I should have documents in place saying what should happen-buy-sell agreements, passwords, all those things. We don’t want any surprises. We want people around the owner to be ready to act, if need be, and at CCA we lead people through that process. And then, if they are set with that stuff and decide they want to sell, they have completed so much of the pre-work that they can start moving forward right away.”

Gauthier believes that another important early step-even before “exit” is on the table-is developing an understanding of the business’ value. This is something that Gauthier advises should be updated every two years through the life of the business, and it’s a process that becomes much simpler after the first valuation is completed.

Brothers Bobby and Bill Croswell, who opened Craft Croswell in 1973, built succession plans into their business from the early years. Fifty-fifty partners, the brothers put a policy in place from the get-go that neither of their offspring would be able to join or purchase the company. Bobby explains that he and Bill made this determination after studying other businesses and speaking with other business leaders. “It’s tough enough for a company to grow without bringing in a kid who feels they have tenure due to their bloodline,” says Bobby. “We wanted to offer our kids the opportunity to do what they wanted. If you let a child in and then find out that their personality isn’t in keeping with the culture of the company, it creates a lot of drama, so we decided to simply say that our kids won’t be involved, and it has turned out great.” He adds that both his and Bill’s children have all found success in their own fields.

But their planning didn’t stop there. “We had a buy-sell agreement funded by insurance in place by the time we were 40,” recalls Bobby. “And the way it worked was that if one partner died, his wife was paid off and was out of the deal. At the same time, in that event, the insurance would defer into compensation funded with life insurance so that if one partner died, the policy funded by the business was activated. Ultimately, the widow would be paid off, and the business would get a cash injection.”

One of the difficult aspects of formulating a plan such as the one Bobby and Bill put together is that it takes money. “So, if your business is profitable, you are hurting your bottom line by taking money out of the business to fund it,” notes Bobby. And, of course, if the business isn’t profitable, the challenge is even greater.

In addition, each Croswell brother had a second-in-command groomed for leadership and ready to step in as needed. Bobby recalls that, throughout the time he and Bill owned the business, there were several tenured individuals in their ranks who wanted, as Bobby calls it, a piece of the rock. “But that would have voided the buy-sells and messed up the forward flow of the company and the 50/50 decision making,” says Bobby, adding that this would also make it possible for things to get messy, should two leaders merge their interests and remove the third.

The negative of this, says Bobby, is that often the top employees they had groomed as seconds were enticed to leave by organizations that would offer them a piece of ownership.

Of forming a succession plan, Bobby reports, “It’s never too early to do it. Creating agreeable plans between owners allows employees to know where they stand. If the road has a detour, those left in leadership don’t have to make a decision; they know the other road.”

He adds, “The process is not as hard as it seems, but many people put it off because they are ignorant. Of the businesses out there, I’d estimate only 35% to 40% have definitive planning in place. Another 20% may be broaching the subject, but most have no clue.”

These days, the motivation to sell is often initiated by potential buyers who express interest in the business. These may be individuals, competitors or private equity firms. John Stanfield, founder of commercial contractor Resource Colorado, notes that while, at one point, it was uncommon for private equity to make investments in the commercial contractor side of the flooring business, today it’s not uncommon to receive four to five inquiries per week from brokers looking to buy.

Says Gordon, “Over the last five years, there has been more equity money focused on the service sector, and that is unusual. In prior years, it was not seen as an attractive investment, but today, it is, even with rising interest rates. If a company is looking to exit, private equity isn’t a bad way to go, but owners never get what they feel the company is worth because private equity is all about making money.”

Furthermore, Gordon notes that private equity buyouts aren’t generally speedy, with most groups requiring former leadership to stay on board for three to five years to protect their investment, using a payout-over-time structure as security that the former owner will follow through. “If the management and sales staff leave, a business isn’t worth much, and private equity firms are smarter than that,” says Gordon.

Another negative of private equity buyouts can be that they don’t maintain the culture of the business, and for leaders who want to ensure the business remains as it is for their team, this can be a disincentive.

Gordon believes that turning a business over to a family member is the “easiest way to do it,” so long as the person is capable and trained to do the job, which is key to ensure acceptance from the staff. “If you are going to bring a second generation in, they have to work their way up the ladder and prove themselves,” he says.

Selling to a competitor or employee generally offers the leader the possibility of a clean break, but the process can be expensive due to professional fees. And while it may be appealing to have a tenured employee take over, that is dependent upon the employee having the finances to do it, notes Gordon.

Both Fuse and CCA have had some members establish employee stock ownership plans (ESOPs) upon their retirement, and while Gordon notes that this has great long-term benefits for the employees, leaders considering an ESOP should know that the process is time consuming and costly.

“It works well when members have revenues of more than $10 million, which gives everyone the opportunity for buy in,” says Gauthier. “The negative of an ESOP is how it’s managed when someone leaves the business.” CCA always recommends that members interested in an ESOP work with an ESOP specialist, and it will facilitate these connections.

The same is true for members seeking to create a co-op, which is similar to an ESOP but less stringent, says Gauthier. In this case, Gauthier recommends that the business partner with a co-op developer.

Oftentimes, leaders who are part of a group, such as Fuse, CCA or Starnet, spread word with other members that their business is up for sale, as members buying members is a fairly commonplace occurrence.

Gauthier also notes that he has seen several sales to entrepreneurs or early retirees from other industries entirely.

For any type of sale, Gauthier recommends that owners begin exploring their options four to five years before they are ready to walk away. He has seen a sale to a family member completed in as little as nine months, but that isn’t always the standard, as lawyers, CPAs, banks and other entities involved in the sale simply need time to do what must be done.

Developing a thoughtful and extensive plan allows the leader to get the most value from their business, and Gauthier is quick to point out that value isn’t just cash. Many leaders care a great deal about the legacy they are leaving behind for their employees and the community; therefore, they want to position the new ownership for success.

One sentence Gauthier hears from 90% of the leaders who approach him about exiting their business is, “I want to sell my business, but don’t tell anyone.” This often emanates from a concern about making the employees feel unstable upon hearing the news. But Gauthier disagrees with the sentiment, believing that a de-risked business with a strong succession plan builds security for the employees. And, further, news “from the horse’s mouth” is always preferable to word spread at the water cooler. “When leaders are telling their teams, ‘We will take care of you,’ it builds confidence,” he notes.

Despite these reassurances, business sales can be sensitive, especially when family is involved, and Gauthier reports that he has sat in many conference rooms, donned his counselor hat and moderated emotionally charged conversations about succession. Ultimately, says Gauthier, “An open conversation doesn’t mean that the problem is solved, but at least everyone knows where they stand afterward.”

Craft Croswell–Ridgeland, Mississippi

After 45 years running Craft Croswell together, Bobby and Bill found themselves with multiple suitors. “Bonitz and private equity were both after us,” says Bobby. However, another Mississippi-based group, with whom Craft Croswell shared a bank, was also interested. Upchurch Companies got its start in plumbing before it began acquiring businesses in the commercial and industrial sectors. The two businesses shared a bank, which made the acquisition relatively simple, and Upchurch Companies took ownership through an asset purchase in 2015.

Upchurch Companies brought in a new leader to run Craft Croswell, but he didn’t work out, and within a few years, Upchurch asked Bobby and Bill if they’d be willing to come back. Both agreed. “Today, we have it back humming along like the old days,” says Bobby. “Even more grandiose!”

Bobby has a great deal of admiration for Upchurch Companies, calling the family “fabulous,” and noting, “The difficulty with being solicited by a national company like Bonitz or Diverzify was that we didn’t know those people as well as we wanted to.” In fact, Bobby and Bill were approached by Bonitz before the recession and probably would have been purchased by that entity had the economy not turned.

“The key is finding the partner you can get in bed with,” continues Bobby. “You have to be patient above all else. If you are eager to move on and don’t do the necessary due diligence, you will regret it. People ask me all the time, ‘How did you sell your company?’ Number one, you have to be very familiar with the valuation. And also, let people know that the business is up for sale. If you let one bird know, word will get around.”

He adds, “Companies in acquisition mode are interested in companies like ours with owners who are ready to sell because of the age factor.”

Resource Colorado–Denver, Colorado
In 1997, when Interface, Shaw and DuPont were buying commercial contracting businesses, all three approached Resource Colorado about acquisition. Owners Stanfield and Duane DeJonge had owned the business for only nine years then and weren’t in the market to sell. However, Stanfield recalls, “We were the largest commercial dealer in Denver, and we had our choice. We went to our sales team and said, ‘We are looking to sell,’ gave them a ballot and said, ‘Which would you rather work for?’ Interface owned Bentley at the time, and we specified more Bentley than Shaw then, so they voted for Interface.”

Stanfield and DeJonge sold their business to Interface but within seven years bought it back.

Then, in 2018, Stanfield and DeJonge began speaking with fellow Starnet member Mr. David’s about a purchase. “They came out and spent a day with us, and we visited them,” recalls Stanfield. “No one was in a big hurry. They made us a good offer, but we didn’t jump right away. Then Covid happened, and everything went on hold.” In the meantime, the leadership at Mr. David’s started to expand and changed the firm name to Diverzify.

Stanfield continues, “In 2021, I called Diverzify and asked if they were still interested. They said, ‘Yes, but we aren’t making acquisitions until things are back to normal.’ I called them in June 2022 and said, ‘Do you still want us, or should we look for another buyer?’”

Stanfield reports that, as he had been through an acquisition previously, his main concern was selling to an operation that would keep the business as an ongoing concern. “We have 40 employees, and I wanted to sell to an operation that knew commercial flooring and understood the nature of the business. I was interested in Diverzify because it does what we do,” notes Stanfield.

This time, rather than ask for the advice of the entire team, Stanfield and DeJonge relied on the insights of five management leaders on their staff, who agreed that a sale to Diverzify was the right move. Stanfield and DeJonge used the same legal and accountant teams that it had for its first sale, and that made the process smooth.

Had they gone the private equity route, Stanfield says, “We probably could have gotten more money, but we wanted something sustainable for the long term without a lot of disruption to the operation. Our central focus was on the stability of the company for the employees and families that got us here. We believed that we needed to do what we could to take care of them long term.”

Floor Connection–Arroyo Grande, California
In 2012, when Deborah Hart moved from North Carolina to Arroyo Grande, California, she found a help-wanted ad on Craigslist seeking a CFO. With a career in accounting to her credit, Hart interviewed and was hired on the spot by Jim Motter, who had founded the business with his wife, Lory, decades before. “I think he liked my Southern accent,” Hart laughs.

“About four years ago, Jim came to me and said that he wanted to retire and sell the business to me,” Hart recalls. “For years, he had traveled a lot and left me to run the business. ‘You are excellent at it,’ he said. I told him, ‘I’m too old to be doing this now, but it would be so much fun.’”

Hart set out looking for a partner to run the technical side and found Mike Pigeon, who had worked for Motter years before. “Jim made us a sweet deal, and we purchased the business a year and a half ago,” reports Hart.

The operational transition was straightforward. Motter had moved to Texas two years prior, so Hart was already president of the operation, overseeing daily operations. “Once the day came, the papers were signed, and it was a done deal,” says Hart, now majority owner of Floor Connection. “Jim’s a wealth of information for me. I never hesitate to call and ask him a question.”

Pigeon and Hart wanted to grow the business by adding ceramic, so Hart procured that license. “The business took off after that,” says Hart. “It’s doing great. We have so much business.” Ceramic sales have added $2 million to revenues.

Only four years in, Hart already has succession plans in place, as well as a timeline for her exit. “I hope in five years to accomplish that and walk away with a little money in my pocket,” she says. In fact, Hart has already purchased a retirement home in Arizona, which her son is currently renting, and hopes to have that paid off by the day she hands over the keys to the business.

Pigeon plans to stay with the business after Hart’s retirement and has expressed interest in buying out Hart’s share. Hart reports that she is open to any type of sale, noting, “If plan A doesn’t work, we’ll go to plan B, then C, then D.”

Copyright 2023 Floor Focus 

Related Topics:Interface, Shaw Industries Group, Inc., Fuse Alliance, Starnet, Fuse