If you want to retire in a few years, or if you unexpectedly die tomorrow, do you have a plan for smoothly transitioning your business to a successor? If so, you’re in a small minority, according to several industry consultants who were interviewed for this article. All said that most dealers have paid scant attention to succession. “It’s an unfortunately common occurrence where dad drops dead, junior takes over, and in two years the business is done,” says Baltimore, Md.-based consultant Mark Wright, who has worked with hundreds of small businesses in his 30-year career.
But the business will have to be transferred some day; according to Gary Pittsford of Castle Wealth Advisors in Indianapolis, the typical pro dealer is a 60-year-old man; other consultants put the figure higher. The bottom line is that it’s an old industry. Luckily, it’s also an industry in which the housing economy has recovered and dealers’ finances are improving. That’s making companies more attractive and it’s opening the door to dealer executives to start thinking about transitioning out.
Whether a business survives succession in good health depends on how systematically the owner has prepared. Sandy Sawyer, a Rhode Island-based consultant whose business includes financial consulting and facilitating roundtables for lumber dealers, says that large operations—those with more than $75 million in annual sales—tend to have the issue totally nailed down. Smaller ones not so much.
“I deal with about 85 lumberyards in my consulting business and maybe four of them have fully prepared,” Sawyer says. “Most owners are so focused on dealing with urgent issues that they avoid important issues like this one.”
The reasons for this avoidance range from being overwhelmed with the details involved in planning a transition to owners’ reluctance to imagine the business moving into the future without them micromanaging. “I’ve known business owners who think their job is to price every ticket that goes out,” says Sawyer. “A better focus would be on setting the culture of the business and planning for succession.”
This focus is in the owner’s self-interest: Chances are the business will be funding his retirement, so it would be wise to make sure it’s in good hands. Everyone we spoke with said that the firms that have a plan, and work it, tend to come through this transition in much better shape.
A good transition plan includes a lot of complicated legal and financial considerations, which include stock transfers, tax planning, and the like. These are crucial but are the subject of a different article. Just as important is the issue of who will take over, how to train them, and how to transition the business to their leadership.
Choosing a Leader
Pittsford estimates that 25% to 30% of owners transfer the business to a son or daughter, while 15% to 20% sell it to a key manager. Some of the issues are common to both situations, while others differ.
With families, of course, things can get quite messy. “You can run into big problems if two or three kids are working in the business and a couple of them want to be president, especially if they don’t get along very well,” says Pittsford, who describes his role as part psychologist.
Some owners contribute to the problem by making decisions purely on subjective reasons–gut feelings. “It’s a big source of conflict,” says Bill Tucker, a consultant and former president of the Florida Building Material Association. “The most successful transitions I’ve seen are where the owner clearly chooses a successor based on objective reasons that can be measured.” These could include the type of college degree each candidate has, tests that identify management and leadership skills, and actual performance reviews.
Jon Davis, a Hutchinson, Kan.-based consultant who was owner and CEO of a three-unit lumber chain for 26 years, says one potential problem may arise when the owner chooses a successor who has a totally different value system. If the owner believes in participative management, then choosing an autocratic leader could send other managers looking for an exit. If the current owner has always run the business on fear, going to a participative model could be just as disruptive, as the current employees may be suspicious of the new approach.
These issues are more easily navigated if an objective person is brought in from outside the company. Ruth Kellick-Grubbs of Kellick and Associates in Tyron, N.C., says that she helps businesses work through these issues by spending time talking with everyone involved about what they want. “If someone objective is facilitating and mediating the process it generally moves more quickly,” she says.
Choosing a successor is just the first step. There needs to be a training plan as well as a plan and timetable for the actual transition. A lot of business owners talk about training, but few put a lot of resources into it, according to our consultants. But training is crucial to a smooth transition.
“Potential successors should get training in finance, in particular balance sheet management as it relates to the building materials industry, even if they graduated from college with a degree in accounting,” says Tucker.
Kellick-Grubbs believes training in change management will help the successor keep the business profitable because rapid change will be the rule as competitive and margin pressures intensify. “It could be as basic as a change in the computer system, or a better inventory management system, which nine times out of 10 means changing business processes.”
The business needs a plan for cross-training the successor in all areas of the business. Pittsford suggests a two-year plan during which the successor executive gets involved in all areas of the business: sales, ordering materials, learning the computer hardware and software, handling the finances, hiring, firing, and promoting employees.
Training for Success
There should also be a plan for helping the successor develop important business relationships. That means involving the successor in all outside activities that impact the business, from the local bank’s annual golf open to industry conferences and roundtables. The owner may have his banker on speed dial but chances are the successor doesn’t. Or the owner may have a 25-year relationship with a vendor that includes co-op advertising and preferred payment terms. The only way to determine if that relationship will continue is to introduce the successor to that vendor. If a successor is a son or daughter who has grown up in the business, Tucker suggests having him or her work somewhere else for a couple of years.
“Pick a premier non-competing company and call them up,” Tucker says. “Offer to underwrite the cost of employment if necessary.” This will expose the kid to new ideas that could help the business grow into the future, and will also provide the kind of discipline and accountability that may be lacking in Dad’s shop. The lumberyard-owning fathers of Bruce Abel and Casey Vorhees did this decades ago when they in effect swapped sons for a year, sending Casey to Juneau, Alaska, and Bruce to Eugene, Ore. Both now say the year away from home was one of the best they’ve ever had.
The issue of accountability is a big one in some family businesses, says Tucker. “Say the owner hires his son or daughter, who has just finished college, as assistant manager of a branch. This puts the branch manager in a tough position. How do you discipline someone who will likely be your boss a few years later? And how do you act when you know that someone has the ear of the owner?” He says the only way to avoid problems is for the owner to acknowledge the pressure this puts on everyone, and to make a real effort to be evenhanded.
Taking the Plunge
Once the owner is confident in the successor’s ability, the actual transition is best handled over a period of time. One way to do this is for the owner to write a description of his responsibilities, then start moving them one by one to the successor.
Owners should also make an effort to get out of the way. “I tell them to take a 10-day vacation right away, and a two-week vacation six months later,” says Pittsford. “It’s a good test of whether the new guy can really run the place.”
Of course, most owners aren’t going to want to go on any sort of permanent vacation. “Say you have 25 items on your responsibility list. As you hand them over, it’s a good idea to start replacing them with other activities,” suggests Wright. “Maybe you’ve never been able to chair the local chamber of commerce or hold a leadership position in the local church. Getting involved in these things will keep the owner from fretting about the business and give the successor a chance to find his sea legs.”
It may also mean a longer retirement. We have all heard stories of people who drop dead shortly after leaving the workforce, but the evidence isn’t just anecdotal. The October 2009 Journal of Occupational Psychology reported a study of 12,000 people who were transitioning or had transitioned to retirement. People who worked in a bridge job experienced fewer major diseases and fewer functional limitations than those who fully retired.
After all, the goal is for the business and the owner to survive and thrive. That should be true both during and after the transition.