A Path To Success: Planning Your Exit
Who will step into your shoes—and when?
After years of working hard, keeping close watch on every aspect of your business, the day w ill come when you want to take i t easy—maybe volunteer more in the community, play some golf, or travel the world. But for you to step back from the business, a successor will need to step in.
“As obvious as that sounds, many contractors have this fantasy where someone just swoops in to run the company for them—and that’s absolutely not going to happen,” emphasizes Randy Stutzman, managing director of FMI Capital Advisors, Inc. “It takes time for a successor to be identified, groomed, trained, and incentivized.”
Ideally, Stutzman says, star t formulating a succession plan seven to 10 years before you’d like to curtail our involvement in the business or walk out the door entirely. If you’d prefer to pull back at the age of 60, for example, star t considering exit strategies in your early 50s. If you’re closer to or over 60, get moving today.
“The best situations I’ve seen are companies where the president or owner has built an organization of people who are as good as—or better—than himself or herself,” notes Stutzman. “By having a great management team in place, they make themselves redundant. Then, by the time they hit 65 or whatever, they no longer have to spend 15 hours a day at work, looking at every bid, checking every job, and reviewing every invoice.”
Time to Plan
Dick Imfeld, who is now 73, began thinking about a successor more than two decades ago—perhaps because he had been somewhat thrust into the role himself. “In 1985, my dad died unexpectedly, and I took over the business. That was the whole transition and succession ‘plan,’” says Imfeld, who has never worked anywhere other than IC Refrigeration in Ceres, Calif.
Since ceding the corner office to his son Rich, Imfeld has had what he calls “the best of all worlds.” As vice president, he works part time, doing the selling and design work he enjoys most, and still has time to play softball and basketball. He looks forward to celebrating his 50th anniversary at the company in July.
But handing off the president’s title to his son wasn’t necessarily Imfeld’s goal. “Well before Rich came on board, I had many tries at perpetuating this business with people outside of the family, including one of my favorite employees,” Imfeld recalls. “It did not work for us, but it might be the best option for another company.”
According to Stutzman, nine out of 10 construction-related companies typically transition ownership by selling to a family member or key employee. “The other choices are to liquidate the business—which very few want to do—or sell to a third party,” he explains. “The reality is, only about 10 percent of the people we talk to have any potential for an external buyout.”
Of course, even an internal sale to people you know and trust doesn’t guarantee long-term success. Just take a look at the statistics assembled by the U.S. Small Business Administration: Overall, about 40 percent of family-owned businesses in the United States pass on to the second generation; 13 percent make it to the third generation, and only 3 percent survive to the fourth.
Making it Work
How can you beat those formidable odds? Here are some tips:
HAVE A BUY/SELL AGREEMENT IN PLACE. This legal document typically spells out how the business will be valued at the time of sale, the source of funding for buying out an owner (or heir), and who has the right of first refusal. The agreement also lists its “triggering events,” such as one partner’s death, disability, departure, fraud, or malfeasance.
INSIST ON OUTSIDE EXPERIENCE FOR A POTENTIAL SUCCESSOR. After graduating from college, Jamie Gerdsen showed up for his job at Apollo Heating & Air Conditioning Co., Inc., in Cincinnati, Ohio. A few weeks later, his father—then Apollo’s president—pulled Gerdsen aside and said, “What are you still doing here? You need to work somewhere else for at least five years.”
Heeding that advice, Gerdsen explains, “I went to work for a technology start-up firm in Florida that focused on telecommunications. The firm ended up going public, and I learned a lot about what not to do in a business.” He returned to Apollo in 2002 and became its president and chief executive officer seven years later.
“Working somewhere else before coming into the business gives the person tremendous credibility,” adds Stutzman. “If a son comes into the family business immediately after high school, for example, he can be there for 30 years and still be considered ‘the kid’” and not be taken seriously as a manager.
CRAFT FAMILY EMPLOYMENT GUIDELINES. “Just because someone’s last name is the same as yours doesn’t mean you hire them,” observes Gerdsen, who suggests creating specific rules for family members wishing to enter the business. “Some businesses, for example, require family members to graduate from college, work elsewhere, not commit any crimes, and earn at least two promotions before taking charge,” he notes. Ideally, spell out these expectations long before the next generation enters the workforce, so they don’t view the family business simply as a birthright.
PROVIDE A PATH TO THE PRESIDENCY. After college graduation and a stint in the banking industry, Rich Imfeld returned to IC Refrigeration in 1992. He started in the service department and progressively took on more management and decision-making responsibilities, becoming president of the mechanical contracting firm in 2008.
Along the way, Dick Imfeld asked his son to buy into the business, which the latter found helpful. “If your money is involved, you become a lot more invested,” Rich Imfeld says.
“Being part of the family gives you a unique avenue into the business, but you still need the ability to make good decisions,” he continues. “Honestly assess the person you are thinking about elevating: Can he or she actually do the job?”
Jamie Gerdsen was given opportunities to prove himself after joining Apollo Heating & Air as a 100% commission salesman. Each year he took on more responsibility, eventually moving up to sales manager, then to office manager, and then to the office of the president.
“Our philosophy is that we’re a business family, not a family business,” says Gerdsen. “We look at the company as being here to produce value for the shareholders and stakeholders; it is not here just to produce a job.”
ASSEMBLE AN ADVISORY TEAM. In addition to an attorney, accountant, insurance agent, banker, and investment advisor, consider working with a consultant who specializes in business transitions. Many universities have family business centers that offer expertise and resources for succession planning.
If the company represents a significant portion of your estate, ensure these experts work in tandem so your succession planning dovetails with your estate planning. Above all, says Stutzman, avoid the common mistake of giving each child or heir an equal interest in the company in the effort to be fair.
“Giving stock to kids who are not involved in the business is a guaranteed way to start a civil war at some point,” Stutzman says. Instead, ensure the stock is controlled by the heirs who are actively involved in the company, and leave something else—stocks, bonds, real estate—to the other heirs.
Rich Imfeld also relies on the seven other members of his MIX Group as an informal board of directors. “Most of them have gone through a succession, so they offer a means of comparison and additional perspectives,” he reports.
Although he isn’t yet old enough to qualify for an AARP membership, Rich Imfeld has already started thinking about a succession plan. “The day you become president is the day you should start giving some thought to your options for succession,” he believes. “What you can do to protect the investment should always be on your mind.”
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Posted In: ACCA Now, Management
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