In our industry, it is easy to focus on the here and now: What do we need to do to have a successful season? How do we increase profits today? What products will drive more sales? However, it is to the detriment of our future if we cannot look further than beyond what is directly in front of us.
This is especially true for succession planning. Having an exit strategy that will carry your business into the future and build upon its current success is imperative, and it’s time to start thinking about it now – even if you’ve only recently taken ownership.
According to the 2014 Family Business Survey from PwC, only 16 percent of family firms have a discussed and documented succession plan in place. When considering how long it takes for a business to plan and effectively execute an ownership transition, this statistic is startling.
David Spader of Spader Business Management said companies that start at least 10 years out in the planning process have about an 85 percent likelihood of still being in business 15 years after the ownership transfer date.
“The odds are pretty good that if you start far enough out that you can make a successful transition. That makes sense in a lot of ways because the more time we have, the more options we have,” said Spader. “[Business owners] don’t really want to start thinking about it that early when in reality those organizations do have an exponentially higher likelihood of success. Those that take just a few years [to plan], the success rates go down sometimes even into the 10 to 20 percent likelihood that it will still be around 15 to 20 years later.”
With that advance planning comes the need for open avenues of communication and trust, particularly for family-owned businesses. While the financial, tax and legal ramifications are important to consider, they are not often what will impact a transition.
“That is the primary reason why most family business transitions – 70 percent-plus – fail, because of the breakdown of trust and communications through that process,” said Don Bielen, director of business advisory services at The Rainier Group, Inc. “I strongly encourage an individual to use a business transition succession planning expert that works as a facilitator with the attorneys, the accountants, the family counselors, the insurance individuals, to facilitate and manage this process, because it is truly a process that requires expertise, skills and experience to effectively work with family businesses and its owners.”
(Find a list of experts at the bottom of the article.)
Whether a transition happens in one transaction or over a period of time ultimately depends on the goals of the seller and the buyer, the capabilities of the buyer and the risk the seller is willing to adopt. An exit plan should be flexible and adaptable so it can work seamlessly with the ebb and flow of market changes.
Regardless of what method you choose, the biggest mistake owners make is focusing too much on the how of transitioning and not on the what. Spader says it is important to first identify what the goals are of both parties.
“They get wrapped up in the mechanics in estate planning and avoiding taxes and a lot of other things that they forget to step back and say what are the key principles and goals and values around which you want this transition to occur. And those should determine the how instead of the how determining the what,” Spader said. “When we go into organizations the first thing that we want to do is talk about what exactly do you want to have occur? What are the values involved? What are the most important goals we have? And after that we look at the various methods, because there are literally hundreds of different options to make a transition happen.”
Part of planning an exit strategy should be planning the life of the current principal post-ownership. Particularly in businesses that choose to transition ownership either to a family member or a key employee over time, one of the biggest sticking points is the blood, sweat and tears the current owner has put into the company. They have invested quite a bit into the success of the business, so what does their new life look like after selling?
Spader said any business planning an exit strategy should incorporate a plan for the current owner to have meaningful goals and activities after ownership, as it will make the process happier and smoother for all parties involved. This could mean consulting within the industry, mentoring young professionals or more. Not planning for this is one of the most significant barriers to successful transitions and makes it hard for owners to let go of control.
“For most entrepreneurs and most small business owners, golfing and fishing will only keep them satisfied for one to two months, and they’ll find themselves gravitating back toward the family business and being involved in ways that hopefully are helpful, but often times are not,” said Spader. “Because those entrepreneurs have so much to offer, there can be a grieving or a period of loss there. And so understanding that and preparing for that ahead of time is very important.”
Part of planning your exit strategy is positioning the business maximize its value to a potential buyer, whether that buyer is internal or a third party.
Buyers will want a business to have a historical record of financial stability and growth – not just proof of one good year. Starting to track your financials and purify them should be the first step for any business, even if transition is still years down the road.
“One of the things that’s typical in the marine industry – I did it and everybody does it – is there’s a lot of personal stuff that’s run through a dealership, and after it’s been done for multiple years you kind of forget what it is, and then sometimes getting a true picture of what the numbers actually are takes some time,” said Austin Singleton, CEO of OneWater Marine Holdings.
The merger of Singleton Marine Group and Legendary Marine created OneWater Marine Holdings. OneWater has aggressive expansion plans, having acquired several dealerships since its inception with plans for more growth. (You can read more about OneWater’s acquisitions at boatingindustry.com/onewatermarineholdings.)
Anyone looking to sell, whether the business is big or small, should begin working with an accounting firm and do a minimum of reviewed statements, if not audited statements.
“That’s the piece that a lot of people, even me in the very beginning, don’t want to spend the money on that stuff, but if it’s in the future to sell the business, the more reviewed or audited financials you have that are consistent, the more valuable and the quicker and cleaner a deal will be,” said Singleton.
Other items of value to potential buyers will always be the culture of the business and the strength of the management team. This makes the transfer a “turnkey operation,” thus very attractive to any kind of investor or successor.
The nitty gritty of sales tax
The sale of a business will typically result in a capital gain. A business owner can look at two different types of purchases: stock or asset sale. A stock sale is often more advantageous for the seller because they can take capital gains on the difference between the investment and the fair market value of the business. An asset sale is more advantageous to the buyer because they have an increased basis in the assets and have a higher depreciable base, so they have higher expenses to offset income and protect their cash flow. There’s an election that a purchaser can make that can treat a purchase as a stock purchase or an asset purchase, depending on the tax advantages, and it’s a special election for the purchaser.
“Generally, the business has two options: You can select and take a deferred installment, in which the business owner realizes the gain over a period of time that they are paid the sale proceeds for their ownership – it’s called a deferred installment sale; or they can make a one-time election and have all the gains paid up front,” said Bielen. “In some cases while we expect higher tax rates downstream, we might not take deferred installment election, pay the gains on the entire purchase, even though they’re going to realize it over a period of years.”
Another element to consider is reorganizing the business so the real estate is moved out of the business, said Bielen. The business owner keeps the real estate, defers the gain, retains the long-term lease and then sells the business to the acquirer.
“You can reduce the total amount of value that’s purchased and all the amount of value that’s going to be taxable by separating the business real estate from the business,” Bielen said.
Where do we go?
As you are planning your exit strategy, the question becomes which type of transition to choose. A family succession to the next generation comes with several different challenges and implications. (See our article on this topic.) However, for many businesses in our industry, family succession is becoming a less likely option. Many owners either have children who are too young to know whether or not they want to own the business, children who are outright disinterested or no children at all. How do you plan for your business’s success with no one to take up the mantle?
There are three key choices for a business owner, and they each come with their own unique set of requirements and strategies for success. We have outlined three different paths you can take and how to maximize the potential of each choice.
Selling to a key employee
Like a family succession, planning to sell the business to a key employee often requires a slow transition of leadership from the seller to the buyer. To highlight all of its intricacies, we looked at a case study of a dealership that has seen success selling to employees.
Phil Miklo, former owner of Oak Hill Marina, first began planning for his and his wife Teresa’s exit strategy by developing an emergency plan roughly a decade ago in case of a tragedy involving Phil. Jake Jostand was the go-to person for Phil at the time, so he was made aware of this emergency plan, and then the Miklos put a plan in place to start putting away funds to help Jostand eventually purchase the business on a long-term plan.
Tim Sather joined the Oak Hill team a few years later, making it very clear in his interview process that he wanted an opportunity to be a partner or purchase the business at some point in time, as he had previously owned a service repair center in Kentucky with a partner.
Once Sather was in the business, all four parties began the conversation of how to eventually transfer ownership to both Jostand and Sather. When things got more serious in August 2014, the conversation became determining percentage of ownership. While Miklo did not intend to be out of the business until he was 60, it became apparent that it would be easier for Jostand and Sather to purchase 100 percent of the business.
“Trying to have three cooks in the kitchen is a little more difficult than having one,” Miklo said.
Timing is incredibly important when selling to an employee. If you have an opportunity to sell to key employees who will succeed with the business, take it, even if it’s not on the timeline you expected.
“If I waited 10 more years, they might not want to be here at that time. It adds 10 years to their life [and] they could be in different places,” said Miklo. “My kids like boating, I just don’t know if it’s something that they want to be in … and they’re too young for me to hold that over them and hope that they’re going to buy it someday. I didn’t want them to feel like they had to be the owners of this dealership 10 or 15 years from now.”
The Miklos are staying on at Oak Hill in a consulting role for up to 10 years. While Jostand and Sather have, together, 35 years of industry experience, this decision will help the new owners with facing challenges they are not familiar with, having never owned the dealership.
“It’s not that these guys don’t know what they have going on, but it’s some things that they may not have seen from the ownership side that pop up on a monthly basis,” said Miklo. “And when you’re buying a business the size that [Oak Hill Marina is], it helps structure the financial side of it a little bit better for both parties involved.”
Transitioning ownership from a current owner to an employee can be difficult, as current owners may have a hard time letting go, but the more current and new owners communicate, the better.
“There has to be a willing buyer, a willing seller and an agreement that makes everybody happy,” said Miklo. “A lot of times there’s some heartburn from one side or the other when you walk away, and I don’t believe we have that.”
In addition to all of the logistics that come with transitioning a business, Jostand and Sather were required to attend management training before the Miklos would sell the business, which everyone agreed was key to their success.
“When the first Leadership Development Program came out, Phil and Teresa sent me to that with the intention of being a prerequisite for me to step into that management role here at the dealership,” said Jostand. “I learned so much there as far as managing people and processes, and not necessarily the dollars and cents side of business.”
This has been especially important for a purchase where there are two employee buyers, not one. Because Jostand and Sather attended the same training, when there is a question about how to handle a situation in the business, the two owners come up with the same answer most of the time.
“One of the key [elements] of that training that’s going to pay dividends for Jake and I for years to come is the fact that we’ve both been through the same training, so when things do arise within the dealership, anything from strategy to people problems, we’ve had the same training and can sit down and have discussion with the same background for our thought processes,” added Sather.
It is important for owners to be thinking about succession early, especially if they plan to sell to an employee instead of a family member. You never know if that seasonal high school hire will want to be an owner 20 years later, as was the case with Jostand for Oak Hill.
“The proper planning has to be there in order for it to work. It starts with management hiring the right people,” said Miklo.
For employees who think they may want to buy their employer’s business someday, it is never too early to start the conversation. In fact, it is better for all parties involved to have it on the table. Just as with a family member, the employee buying the business needs to understand all of its intricacies and have a passion for ownership.
“Learn your business. If you do have any aspirations of purchasing your place of employment, you need to wake up every day with the passion and the drive to go to work and operate the business as your own,” said Sather.
Selling to a third party
For a dealership with no family members or key employees interested in taking over, the next choice is to sell the business to an outside buyer. This route does not take as long to execute but still requires forethought on the current owner’s part.
A third-party buyer, whether or not they are already involved in the industry, will look at all of the elements that create value in the business: Financials, quality of brands carried if it’s a dealership, the market area of the business and more.
However, what ultimately becomes the most attractive asset are the people who come with the sale.
Singleton said OneWater looks for dealerships that have a “right-hand man,” someone who knows the role of the owner/principal and could run the business without the existing owner present. This person is key to helping the new buyer work through the first years after the acquisition.
“To us, that’s the silver bullet,” Singleton said. “Typically that particular person is already running the business [and] the owner is micromanaging that person. It’s not a bad thing; it’s just that if you take the seat of the owner/principal, you’re still the one that has all the risk. You’re the one that’s guaranteeing the floorplan, you’re the one whose neck is on the line financially, and sometimes, especially over a long period of time, it’s hard to let go and trust somebody to do that.”
The value of employees is truly immeasurable, at all levels. If you know that, down the line, you will eventually want to sell your business to a third party due to a lack of family member or key employee interest, the first thing you should do is start hiring and training the right people.
“A business is not as valuable to us if we were to have to go in and bring all new employees. The value in what we’re doing is really the people. They carry the most value,” said Singleton. “For a brand new dealership today that is thinking, at some point in time, that they’re going to have to sell to somebody, their greatest builder of value is to bring in good people [and] train them very well so that they understand and can run the business, or run their particular departments at a high level, because that makes them more valuable than anything else they can do.”
Singleton added that the value of the existing owner is also key to a buyer. In the OneWater model, purchased dealerships keep their existing branding, due to their value in their communities, and owners are offered the opportunity to stay on and work in the business, eventually exiting on their own time.
“We are more than interested and really like to unload the day-to-day burden or minutia of the business off of the owner and let them get back to the reason they originally got in the business, which was selling boats and taking care of customers,” said Singleton. “They might want to work a couple more years, and really what we’ve found is a lot of them want to work longer than they thought they did because they don’t have to deal with the stuff they didn’t like – they only have to deal with the stuff they like.”
In any third-party sale, constant communication about all aspects of the business will make the transition simpler for both seller and buyer.
“Be transparent. If there’s not transparency, the opportunity to sell your business gets very small. If there’s a wart in your business, you might as well tell the person looking to purchase your business that there’s a wart, because it’s going to come out in due diligence at some point,” said Paul Nickel, president of Pride Marine Group, which owns 11 Canadian dealerships.
Selling a business, in many cases, is not as drawn-out of a process as transitioning ownership to a family member or key employee. For a dealership, Singleton said the OneWater model can close deals in 90 to 120 days. However, timing is still important, based on when buyers are looking to purchase.
“It’s always easier as a buyer to purchase a dealership at the end of a quarter or the end of a calendar year,” said Singleton. “At the end of the season, spend the slower months of fall cleaning up everything and getting the books scrubbed, get everything set up and start looking for that potential buyer at the end of the season so that they can get a close at the beginning of the year.”
That being said, owners who know they will eventually want to sell their business should not wait until the last minute to make the decision. Executing the deal does not take time but the more you plan, the more value your business will have and be able to realize.
“If you’re thinking of selling, don’t wait until you don’t have options,” said Nickel. “When your back is up against the wall isn’t the best time to maximize value.”
Employee stock ownership plan
An employee stock ownership plan (ESOP) is an employee-owner program that provides a company’s workforce with an ownership interest in the business. In an ESOP, companies provide employees with stock ownership, often at no upfront cost to the employees. ESOPs are most commonly used to provide a market for the shares of departing owners of successful closely-held companies, to motivate and reward employees, or to take advantage of incentives to borrow money for acquiring new assets in pre-tax dollars. In almost every case, ESOPs are a contribution to the employee, not an employee purchase.
Companies set up a trust fund for employees and contribute either cash to buy company stock, contribute shares directly to the plan or have the plan borrow money to buy shares. If the ESOP borrows money, the company makes contributions to the plan to enable it to repay the loan. Contributions to the ESOP are tax-deductible and employees pay no tax on the contributions until they receive the stock when they leave or retire.
(More information on ESOPs can be found at www.nceo.org.)
There are two types of ESOP transactions: leveraged, where the business will borrow capital to finance and fund the ESOP to keep most of the leverage inside the ESOP; and unleveraged, where the owner uses funds inside a retirement plan but are also taking an installment note where the business owner is the source of capital to fund the employee stock ownership plan.
“The advantages to the business owner is they typically have a tax preferential treatment in the sale, so since they’re selling their stock to a retirement plan, then they can take those proceeds and invest it in what you call a qualified replacement securities, and defer the gain and realize the gain as they sell those securities through time,” said Bielen.
According to Bielen, an ESOP generally has several requirements to be successful:
• The business has a sizable employee base so that owners can spread the risk amongst those employees, thus not placing too much risk on said employees purchasing through a qualified retirement plan;
• The business has little to no debt, as an ESOP looks at the risk associated with the employees and the risk of an owner’s leverage on the business;
• The business already has a strong leadership and management team in place that can take the place of the exiting shareholder;
• The business has a large retirement plan that is well-funded, which can be used to fund the purchase of the buyer; and
• The business is going through substantial growth that is stable, has a long operating history, has strong banking relationships and has other access to capital.
ESOPs can generally range from $10,000 to $50,000 a year to maintain, due to the cost of the reporting, measuring (in terms of the value measurements) and the education of the employee group participating in the ESOP. Many ESOPs have employees with a large percentage of their retirement invested in the business.
“The general rule in our experience … ESOPs are a very challenging transition strategy to use, both financially and economically. It’s generally expensive from an administrative, oversight and annual valuation requirements,” said Bielen. “So ESOPs, generally, we have found are more likely to be one of the last alternatives used when structuring an internal transition plan.”
Succession planning experts
If you are looking for help planning your exit strategy, consider using an expert. Below is a list of options within and outside of the marine industry:
• Spader Business Management (www.spader.com)
• Parker Business Planning (www.parkerbusinessplanning.com)
• Thomas Williams Deans, Ph.D. (www.everyfamiliesbusiness.com)
• The Michaud Group (www.lauramichaud.com)
• Heidrick & Struggles (www.heidrick.com)