Call it being fortunate or unfortunate, I grew up in a family of entrepreneurs. My grandfather, Leonard, owned Pletzer Insurance Agency in Spring Green. My other grandfather, Shelton, owned Shelton’s Bar and Restaurant in Cross Plains. My father, Gene, owned Gene’s Professional Hair Care in Madison.
Entrepreneurship is in my blood and I’ve seen my share of transition from one generation to the other. In the case of my grandfather Leonard, he was fortunate to have his daughter Judy working for him. When it came time for him to retire, his succession plan was already in place: Judy. Grandpa worked out a fair deal for Judy that would allow his legacy to live on while providing income for him and my grandmother throughout their retirement. Today, Pletzer Insurance is in its third generation with my cousin Chad Price at the helm. Pletzer insurance agency is an example of good succession planning at play.
Unfortunately, my other two experiences did not go as well.
My grandfather Shelton was diagnosed with ALS and was forced to sell his business to his four sons. During its hay day, Shelton’s was the place to be. Friday night fish fries were standing-room only. Unfortunately, my grandfather’s time came far too early and he was not able to enjoy the retirement he always dreamed of. That said, he was fortunate to have children that worked at the restaurant for many years, who were poised to take over. The restaurant survived for quite a few years later, but eventually went under when the brothers disbanded. Shelton’s lasted 49 years. It was a sad day when it closed.
In my father’s case, he ran a very successful hair replacement business for over 34 years. Dad was the lifeblood of the business. Although he had four other stylists, the business and reputation was clearly built on him. Heck, his name was the business’s name.
My father tried many times to entice me and my sisters to join the business, but we did not share his passion for the business that he did. So, my father continued on, building the business without our involvement until the worst day of my life, when I found out he was diagnosed with pancreatic cancer. With his diagnosis came a prognosis to live no more than six to 12 months. Fortunately, my father beat the odds, but not by much. On March 3, 2013, my father passed away surrounded by family.
In passing, my father left us with quite a mess to manage. We had a business with long-standing employees but no one to manage the day-to-day operations. Our assistant who ran the operations in his absence quit the month before my father’s death. Needless to say, it was a trying time for my family. I was traveling for work three days a week, my mother was in no state to manage the business, and my two sisters were too busy with their growing families to take it over. We were left with no option but to close or sell.
Fortunately for us, we found a suitable buyer and were able to sell the business and property. Unfortunately, we were forced to sell what was supposed to be a long-term annuity for our family – the building. Without the building, the valuation for the business just wasn’t there to attract the right buyers.
These experiences fueled a passion in me to ensure this story doesn’t repeat itself for our clients. In our case with Gene’s, things could have been much worse. That said, we have found the stakes are much higher for our clients.
In our experience, we have seen closely held family businesses are often the focal point of the family. They are the glue that holds the family together. In my father’s case, he said he was “married to his business”; he even wore a ring that said “Gene’s Professional Hair Care” on his ring finger to prove it. If that glue is not carefully peeled away from the family, the trauma that it provides through the separation can be unrepairable. Our goal is to ensure that doesn’t happen.
My grandparents’, uncles’ and father’s stories are very similar to those in the construction industry. Many construction organizations are multi-generational – built off the reputation of the family and the quality of the work provided. Unfortunately, as in our case, as the glue (the family) is removed from the business, more often than not the businesses falter or fail altogether. Add on top of that an economy that many would argue is primed for another economic downturn, the odds of a successful succession to the next generation of owners only becomes more challenging.
So, the question is … what do we do about it? How can we ensure the companies that have worked so hard to build do not fall victim to the “glue effect” and the economy?
Just like a doctor, we believe prescription without diagnosis is malpractice. Often, for business owners who literally grew up in their business, it can be a challenge to see the trees through the forest. To clear up the picture, we would recommend having a third party evaluate your organization to provide an objective diagnostic as to how your business ranks for potential succession: At Risk, Average, Well-Maintained or Excellent.
There are six elements that we would recommend consideration for evaluation:
- Your People
- Your Processes
- Your Performance Metrics
- Your Team’s Passion
- Your Positions.
A good third-party organization should have experience conducting assessments through staff interviews, utilizing assessment tools such as DiSC™, Devine, Strengths Finders, 360-analysis, etc., conducting market research through in-depth interviews, surveys, focus groups, etc.
Once you have a good evaluation and assessment of the current status of your team, your organization and your processes, it will empower you to have a clear understanding of where your gaps are and what you need to do to overcome them.
From our experience, the gaps typically fall into a handful of categories. Below are a few of the more prominent ones we see:
- Not having the right team in place
- No documented procedures and processes
- Stale marketing/sales strategy
- Outdated technology
Let’s dive into greater detail.
Not having the right team in place
We have found that family-based businesses’ strengths and weaknesses often lie within the name “family.” They typically involve family and/or treat their employees like family. At times, this can mean being too lax on roles and responsibilities or not having clear roles and responsibilities at all. It can also lead to taking for granted the developmental needs of the staff. Over time, a compounding effect can occur here, and when it comes time to sell, it can often be too late. A loss of a key stakeholder such as the primary owner – even if family continues to be involved – can be far too large of a gap for the family to address in such a short period of time. Proactive training can be a key to success. All too often, organizations promote people and then train them. This immediately sets them up for failure. The more proactive your organization can be with training, the more empowered your people will be when and if a succession plan is put into place.
No documented processes or procedures
Many closely held businesses are built upon the backs of one or two individuals being the face of the company. We find they often lead the sales efforts of the organization as well. Over time, one becomes more comfortable with selling in their own way and success continues to grow. Once that person is gone, however, it’s rare that the processes that the person relied upon are documented in a fashion that others can pick up right where they were left. This forces the new “owners” or successors to recreate the wheel. In doing so, sales typically slow and performance lacks. Organizations should take the time to document their processes and procedures whether it be accounting, sales, billing, project management, etc. before they are put in a position where they are forced to do so. This is working “on the business,” not “in the business.” In a time of need, it can be difficult to pull the business owner away from their day to day activities to do so, but it can be one of the most profitable activities when preparing an organization for a transition.
Stale marketing/sales strategy
Reputation and referrals are often the keys to success in the construction industry. People refer to people they like, people like people like themselves, therefore people buy from people like themselves. If an organization is built off of a “personality” such as my father’s business, when that personality is removed, the referrals often dry up, as does the business. To hedge this off, we recommend a slow transition away from the “personal brand” to the “professional brand.” This is where processes and procedures should be sold, rather than personality. As with anything, however, this transition can take some time and isn’t something that should be done overnight. It should be carefully plotted, much like the moves in a chess match.
Gone are the days of carbon copies and Excel spreadsheets. Now are the days of integrated CRMs and ERPs. Many business owners become comfortable with their practices and believe, “If it’s not broke, don’t fix it.” The challenge with this is that it typically leaves a potential successor or suitor for your business without accurate records, confusion and potential loss of operational efficiency. If you don’t want to be tied to your business through the sale with an employment contract and you want to walk away free and clear, you owe it to yourself and your employees to get with the times, regardless of the pain required to do so. The more your business can run without you, the higher the valuation you will have. With that said, if you are like my father, there is a good chance that you are a “control freak” and don’t necessarily want to have your business run without you. You thrive upon your team’s need of your approval and bask in the attention it provides you. Although attention is great when you’re working, if you want to retire, you’ll need to deal with losing the attention anyways. So why not adopt some technology that allows the business to run without you now, so you can reap the rewards later?
As you go through this list, you may be feeling the weight of the world on your shoulders. As a fellow business owner, I know I do as I write this. With that said, I’m in a position where my business has time, and since we consult on these practices, we feel that we are in a better position than most. Not everyone has that luxury though.
You may be asking yourself, “How soon do I need to start working on all of this before I want to sell or transition?” The answer is now. It may be too late, but it can never be too early. In the case of my father and grandfather, it was too late. They didn’t get to enjoy the spoils of their lifetime efforts and achievements, and unfortunately, due to their lack of forethought, their families did not get to enjoy them nearly as much as they should have, either.
According to Generation Equity, there are over 12 million baby boomers who own a business and more than 70 percent of them are looking to retire over the next few decades. This is only going to increase competitiveness in the marketplace. Those that take the time to prepare their business for succession now will reap the rewards later. The question is, which side of the coin do you want to be on?