By Harrell Kerkhoff
Maintenance Sales News Editor
Running a business is hard. Keeping that business in operation from one generation to the next is much harder. Addressing this challenge during a recent conference of manufacturers and suppliers of cleaning products was guest speaker Bethany Hearn. She has 27 years of public accounting experience, the last 17 focused on valuation and forensic accounting services for owners of privately-held companies.
Hearn, who is a principal at CliftonLarsonAllen, in Champaign, IL, titled her presentation, “Succession Planning: Start Early.” To make her point on the importance of proper and early succession planning, Hearn gave two real-life examples of company owners wanting to hand down the family business to the next generation. One has a happy ending, while the other does not.
The first company Hearn discussed was in its second generation of ownership and was transitioning to the third generation. This company did not have a business or written growth plan in place. When the third generation took over management, it was an abrupt change. Members of the third generation decided that the company’s current building needed to be expanded. A state-of-the-art facility was built, with the anticipation that new business would follow.
“Unfortunately, that new business never came. Within two years of building a beautiful facility, the company went bankrupt,” Hearn said.
The second company Hearn discussed featured a founder who wanted to transition the business to the second generation. He had a business and succession plan. He also knew the true value of his business, identified key members of management and had a management succession plan in place. The founder transitioned 100 percent of his ownership to his two sons, who were working in the business. A management team, however, which did not include the two sons, took over the actual running of the company.
“Now, the founder’s two sons still own 100 percent of the business, but they are not actually running the company at this time. The company is growing and successful, and those two sons will eventually move into positions that they are most qualified for,” Hearn said. “What is the difference in these two stories besides one company failing and one company succeeding in the succession process? The difference is in the amount of planning that took place, and understanding the goals, abilities and dreams of the next generation.
“The owner of the first company wanted to transition everything to the next generation, but didn’t bother to figure out if the next generation was ready, or qualified, to take over the business. The second story was completely different. The founder had outside advisors and a clear plan and direction.”
What Is Succession Planning?
According to Hearn, succession planning is different from what a lot of people think. Some may equate succession planning to estate planning, but it’s much more than getting something when someone dies. It’s also more than just thinking about retirement or selling a business.
“In fact, you can actually retire from running your business and still maintain ownership. This gives you flexibility and options to still control the business and oversee the strategic direction of the company, while allowing management to take care of day-to-day operations,” Hearn said. “It also gives you a security net to step back into, if necessary. It’s important to always have flexibility and options. You don’t want to be tied to just one succession plan or one path.”
She noted that CliftonLarsonAllen conducts surveys involving manufacturing companies related to different business challenges. One recent survey showed that 40 percent of business owners plan to have a leadership transition take place at their company within the next five years. Although just 20 percent of these people said they were totally prepared for the change, 62 percent said they had confidence in their management team; and 39 percent stated they were concerned about finding and/or retaining employees during, and after, the transition process.
“There is a problem here. It shows a significant disconnect between those who say they have confidence in their management team, and yet are not ready for change. They may also need new management, but are concerned about where to find qualified people to run the business,” Hearn said. “We also looked at ownership transition. Again, there were a significant number of businesses in our survey that were going to change ownership within the next five years. The majority of these company leaders foresaw transitioning to family members. There were a few looking at a strategic acquisition situation, and a few looking at possibly selling the company to a management team or to a private equity group.”
Unfortunately, Hearn said, statistics show that the survival rate of businesses from one generation of family members to the next greatly decreases over time. By the fourth generation, only 1 percent of family companies survive.
“It’s important to understand why this happens. Why do businesses fail when they go to the next generation? It’s often due to a lack of planning and lack of clear goals,” Hearn said. “There are different interest groups that all need to be considered with a transition, and the goals need to be identified for each group. Planning is very important. Having your eyes open, and being realistic in expectations, is also important.
“I have three sons. Not one of them is me and has the same passions as I have. They are all different. Having an understanding of the strengths and weaknesses of the next generation, what their goals are, and really giving them choices, are all very important steps to take. Sometimes, I find a business owner assuming that his/her children want to be part of the family business, but that is not always the case.”
She added that exit strategies for business owners should not be narrowed to one or two options. In fact, there are several options available and often used. This includes: retire and retain ownership; transfer or sell to the next family generation; sell or transfer to a management group; sell to an ESOP; or sell to a third party.
“Business owners should not feel like they are stuck in one situation or one exit opportunity,” Hearn said. “Each transition option has unique advantages and disadvantages. Understanding each one, and what works best for a particular business and particular goals, is essential.”
There are three main interest groups involved in every closely-held family business, Hearn added. This includes the family of the owners, the actual owner or owners, and the company and its management team. These are the interested parties that need to be considered, and planned for, during a succession event.
“The concerns, desires and goals of all three groups need to be evaluated and weighed in order to receive the full ‘buy-in’ from all sides when it comes to succession,” she said. “This is vital as all businesses either transition at some point or cease to exist. Change is inevitable.”
She noted that there can be real differences between these three interest groups. They are not all going to have the exact concerns, but there is some overlap.
“It’s important to identify the overlap, how to best accommodate it, and then understand how all the plans, goals and dreams of each interest group can work together,” Hearn said.
For any company with one or more shareholders, it’s not only critical that a shareholder agreement is written by a professional, but also understood by all parties, according to Hearn.
“If you are part of an LLC business, the terms of a shareholder agreement can be incorporated into the company’s operating agreement,” Hearn said. “And don’t just put the shareholder agreement in a drawer and forget about it. It’s important to understand the terms of that agreement, and what will happen if there is a triggering event at your company.”
She added the companies with no shareholder agreements can face devastating consequences. This is especially true in the wake of a sudden death within ownership, or if an owner wants to retire, but still retain full control of his/her company’s direction after retirement.
“You don’t want to find out what could happen to your company without a shareholder agreement in hand. Attorneys write these agreements, and your CPA and/or other financial advisors can help as well,” Hearn said.
Properly planning for a family also includes figuring out how much wealth is tied up in the family business. Sometimes its 75 percent or more. However, there are ways to get wealth out of the business, without hurting the value of that company.
“It takes careful planning, understanding cash flow and where the company is heading,” Hearn said.
Referring back to the management of a company during the succession process, Hearn said it’s important to keep members of the management team up-to-date regarding the company’s future direction.
“If you are not honest with management, you may lose them. You want to keep your management team together and engaged. It all starts with a plan of how to best handle this type of situation,” she added.
Once there is a succession plan in place for owners, family and management, Hearn said it’s essential to continually re-evaluate the plan. Updates and changes may be necessary. The company’s value may also change over time.
To help business owners better understand the true value of their individual companies, Hearn said professionals at CliftonLarsonAllen have designed the “Value Triangle©.” It features four key areas of value. These are: the financial engine, the leadership team engine, the growth engine, and the execution engine.
“All four of these areas need to be strong. If you have one weak triangle, you end up with a lopsided pyramid,” Hearn said.
She added that keeping each of the four “engines” in balance leads to greater enterprise value and better options for succession.
“A key limiting factor that I see in most businesses involves a concentration risk, such as relying on too few suppliers and/or customers for growth,” Hearn said. “Such concentration risk can hurt the value of a business when it comes time for succession.”
When To Start
Thinking About Succession
How early does a business owner need to start planning for a management or ownership succession event? According to Hearn, it’s never too early.
“This doesn’t mean that everything you planned will eventually happen. You may have to revise that plan over and over again, but you should start early. It helps mitigate unrealistic expectations,” Hearn said. “There may be children of an owner who automatically think they are guaranteed to run the business one day. A business owner can clear the picture early by having a good plan in place. That owner can also free his/her kids to do what they are passionate about, if they do not wish to work for the family company their entire lives.
“Smooth succession planning is also about keeping your management team engaged, and helping to make sure they understand the direction of the company. This also helps prevent employee turnover. It’s always good to not lose employees due to a lack of clarity or direction.”
Early succession planning also helps business owners have a better idea of how much money will be needed for their retirement, and where this money will come from.
“I was working with a business owner who told me he wanted to build the value of his business so that he could sell it to his management team and retire by Jan. 1, 2020. I asked, ‘Can they afford to buy you out?’ He responded, ‘No.’ So, I asked, ‘Do you have to wait to Jan. 1, 2020, to start the selling process of your business?’ He asked, ‘What other option do I have?’ I then said, ‘You can develop a plan to get a certain percentage of company ownership in the hands of management prior to that date. This will allow them to have collateral for a loan to buy you out by Jan. 1, 2020,’” Hearn said. “That is the advantage of planning early.”
She added that early conversations about succession with family, and other interested parties, is a good first step to take when thinking about the future.
“These conversations can be with your management team, other owners in the company, and family. Find out their expectations. You can also establish an exit date which can always change,” Hearn said. “It’s good to be flexible and know your weaknessess. Nobody is good at everything. Succession planning is no different. Don’t do this alone. Get other people involved. By getting help, you are actually showing your strength as a leader.
“Build a team that includes those from outside of your business and outside of your family. This team should consist of professionals who will walk alongside you and be honest.”
Contact Bethany Hearn at firstname.lastname@example.org
for more information.
Spartan’s Nick Heintz Named Matera Paper’s 2016 Vendor Rep
Of The Year
Spartan Chemical Company’s Nick Heintz, a regional manager at Spartan Chemical Company, was named Matera Paper Company’s 2016 Vendor Representative Of The Year for the San Antonio and Austin,TX, locations.
“The award is presented based on factors such as reliability, problem solving and being an expert in product knowledge. This year, Nick Heintz received the award.
“Nick exhibits these attributes and more,” said John Richardson, president of Matera Paper Company. “We’re glad we have him on our side.”
The award was presented to Heintz by Richardson during Matera Paper’s holiday luncheon. Spartan was also represented by David Cox, divisional manager.
Matera Paper Company has supplied commercial and industrial cleaning supplies and janitorial products in Texas since 1957. It provides commercial and industrial cleaning chemicals, supplies and cleaning equipment to Texas facilities in Houston, San Antonio, and statewide. The company’s 250,000-square-foot warehouse contains an inventory of more than 3,500 products and a fleet of delivery trucks.
Shown, left to right, are John Richardson, president of Matera Paper Company; Nick Heintz, regional manager, and David Cox, divisional manager, both with Spartan Chemical.
A U.S. employer, Spartan manufactures products from its manufacturing facility in Maumee, OH, and sells both domestically and internationally through a network of distribution.
Visit www.spartanchemical.com for more information.
From Rubbermaid® Commercial Products:
New Products For 2017
“Rubbermaid’s Enhance collection was developed with designers to create a line of trash cans that can be tailored to complement a property’s upscale décor. The contrasting frame and panels offer a modern appearance. With more than 200 different color options, panels can easily be replaced and offer an affordable option to refresh the look of any property,” said RCP.
Rubbermaid’s Enhance collection
“Floating lids give the appearance of lightness, designed to reduce the chance of pinching, and a flare on the receptacle rim provides visual appeal while allowing room for users’ hands to grip the plastic liner during removal. The premium trash receptacles also include a fingerprint resistant coating that helps prevent smudges and makes it easier to maintain a high-quality look over time.”
RCP also has introduced its BRUTE® Step-On Rollout Container. RCP has added a step-on feature to its BRUTE hands-free trash cans. The company has incorporated heavy-duty wheels with high-performance treads and swivel casters to the container for indoor and outdoor use. RCP’s full line of utility trash cans also includes the Slim Jim® and Slim Jim® Step-On containers.
BRUTE® Step-On Rollout Container
RCP is also offering new washroom technology with four products power-driven by a renewable energy system called LumeCel™ Technology.
According to a press release, this includes:
– A smart, effective and cost-efficient solution for battery-free operation. Product lines are:
• Microburst® 3000 with LumeCel™ Technology
—This dispensing system neutralizes odors to leave a clean, fresh scent in any washroom. Its alkaline battery-free operation helps eliminate the need to purchase, store, replace and dispose of traditional alkaline batteries;
• AutoFoam with LumeCel™ Technology — Available in five different colors, the touch-free dispenser is self-powered by both artificial and natural indoor lighting. Enriched foam refills deliver up to 2,750 hand washes;
• AutoClean® with LumeCel™ Technology — The automated dispensers are equipped with easy installation to allow its cleaning solution to reach hard-to-clean areas. Delivering a consistent metered dosage of Bio-Purinel concentrated formulas, AutoClean® dispensers can help eliminate odors, reduce hard water deposits and cut cleaning time and material costs; and,
• AutoJanitor® with LumeCel™ Technology— The programmable dispenser operates automatically to clean and deodorize bathroom fixtures and surfaces. The AutoJanitor® drain maintenance formula is enzyme-based to help prevent scale build-up in drain pipes.
A passive odor control system that is sleek, modern and compact. Available in four color options, it’s orientation independent and spill resistant, with the ability to mount to a variety of surfaces. TCell 2.0 utilizes advanced Fuel Cell Technology, delivering a precise, timed dose of high-quality fragrance to enhance any space for up to 45 days;
Scentelligent® Wide Area Air Care
The air care system delivers consistent, precise, ambient fragrance. Scentelligent connects to RCP’s integrated, global network via the web. This enables each fixture to communicate with a centralized command center and the user’s Smartphone to ensure fragrance levels are monitored and proactively maintained; and,
Scentelligent® Wide Area Air Care
The app for multiple environments is designed to help users select washroom solutions specific to their environment. The interactive app features industry specific washroom simulations that highlight products of particular interest to them and enables users to access videos, installation, instructions and more.”
RCP, an ISO 9001:2000 manufacturer, is part of Newell Brands’ global portfolio of brands.
Visit www.rubbermaidcommercial.com for more information.