Note to whoever wrote that nobody’s tombstone ever carried a wish they had spent more time at the office: Clearly, you never met an LBM executive.
High-ranking dealers typically keep such grueling schedules that a 50-hour work week borders on vacation. What’s more, the job never ends. We asked dozens of people to provide examples of dealer owners who retired happily from LBM. Hardly anyone could name a soul.
Contemplating life away from the yard frightens so many executives that counselors say they often get handed succession issues that should have been addressed—and resolved with far less heartache—years earlier. And while most of the attention around succession planning these days has focused on outside buyers and what sorts of multiples they’d pay to buy a business, experts say the real keys to succession planning lie elsewhere.
Successfully transitioning out of LBM requires you do three things, says Jan Flynn, a professor at Georgia College who co-directs Legacy, a succession-oriented discussion group organized by the Construction Suppliers Association. The first is that you create a business that’s strong and sound. Second, your family dynamic must be equally strong. And third, she says, “You have got to do some work on how to move yourself out of this 14-hour-a-day process that you’ve been in all your life to create something different.
“Getting the business in order is the easiest piece,” Flynn adds. “The more difficult stuff are the family issues that need to be cleared up and how that individual is looking to approach retirement.”
Too often, Flynn and other advisers say, an LBM owner isn’t looking to retire because they don’t or won’t think about walking away. So here’s the core question: Can you let go?
“Thirty percent of the time, that really is the crux of the issue: They’re not willing to let go,” says Vaughan Scott, a family business specialist for Wells Fargo’s Axiom Financial Strategies Group, based near Louisville, Ky. “When I find situations in which the current owners or founders are in their 70s and 80s [and have] just begun succession planning, 90% of the time I have my firefighter helmet on from day 1.”
Shifting to retiree status can make an LBM executive feel as if he’s transformed from the heart of the operation to its appendix: a useless appendage, and a potential danger if not removed over time.
“I hated it, but I knew it was the best thing to do,” says Bob Goebel, the No. 2 man at Star Lumber in Wichita, Kan., until his retirement in 1995. Goebel remained on the board as a major stockholder when a new generation took over the family-run business. He still sits on the board and visits regularly, but mainly it’s to scrounge for leftover wood that he can use in his shop. (Profile)
In a sense, leaving LBM in a well-planned fashion is one of the most important business strategies you can implement if you want to assure that the operation you worked on so hard will survive and thrive. Current workers hate surprises and uncertainties, and prospective workers don’t want to commit to a chaotic state.
“The question that is often missed is how a lack of succession planning at the ownership and president level negatively impacts the company’s recruiting ability at all positions,” says Tony Misura, a corporate headhunter in Minneapolis who runs the Misura Group. “Financial stability, growth, and entrepreneurial culture remain the most desired company traits from our top talent. If a company does not have a succession plan in place, what message does that send as to the predictability of those key values and the company culture in the future?”
All in the Family
Misura and others say the best succession plans begin roughly 10 years ahead of when the transition will occur. You can cut that time to as little as five years, but in general, the longer you wait the more torment you’ll incur. Says Misura: “Many owners’ actions reflect the belief they will live forever, and never face an illness that could remove them from the business.”
If a child is part of the plans, you needn’t wait until you’re 10 years out. Cally Fromme, who ran Zarsky Lumber in Victoria, Texas, and became an executive at Kodiak Building Partners after Kodiak bought Zarsky, says her late father did a great job with estate planning but wasn’t as great at teaching her the ropes.
“It took me pulling it out of him when he seemed to think I should get it by osmosis,” Fromme says. She credits much of what she learned about management from a training program she was in when she spent a few years with The Emporium retail fashion chain just after college.
“I would advise other LBM presidents to teach your kids,” Fromme says. “It’s not a natural thing. Let your kids go to roundtables and send them to industry events.”
Communicating with the kids extends well beyond training. A family business combines the emotions and dynamics of two quite different structures. Almost invariably, experts say, trying to resolve business problems will test and often alter how family members relate.
That’s why the first thing Scott does when he sits down with a family business is set rules for the meetings. One is: “We will be respectful of each other at all times.” Another is: “We will work to avoid assigning motives or blame.” Scott says he does this because family meetings often come preloaded with assumptions and problems.
Look Forward Only
“The point of this—and this is important—is that when you have the open dialogue and don’t assign motives or blame, you can move things forward,” Scott says. In fact, one of the other rules he pushes is: “We are only looking forward, as that is all we can have an impact on.”
Bob Goebel credits nephew Chris Goebel, Star Lumber’s president, with trying to get members of the family to start thinking like stockholders. “We’ve seen some other businesses here in Wichita, some of them in the lumber business, that couldn’t cope with the family pushing and pulling them,” Bob says. “We’ve tried to pass on the dividends at the time of taxes and more than cover the taxes. Other than that, we just told the family that we’re not putting [other capital] out.”
Scott also endorses the need for a family’s mindset to evolve. “There is all kinds of evidence that as soon as a business or a group of shareholders really the view the business as only there to serve themselves, that is a recipe for very nasty things to start to occur,” he says.
A well-run family business can generate returns on investment that top those of public companies, Scott says, but only if it can manage the tension between long-term wealth-building and some stockholders’ desire to cash in. Thus, it’s vital to make sure all the stockholders are on board. Scott says, “The best businesses that I see create a liquidity pool and an annual valuation process whereby anybody who brings their stock to the window can get a fair price and cash in.
“When you have a culture of shareholders who appreciate and respect the value the company brings, not just to them but to the community, they understand what it means to be a responsible shareholder,” Scott adds. “Yes, a dividend needs to be established, but if the business needs investment, that flexibility on the part of the shareholders needs to be there. If a business can’t re-invest, the end is near.”
Resolving the Conflict Within
Your role as perhaps the most important member of this family business also requires that you settle the squabbles inside your head, often before you sit down with others. That can be hard to do given your daily responsibilities and a lack of resources. Flynn says that’s the benefit of the Legacy discussion group. Members of this roundtable come together to learn succession planning basics, hear others’ experiences, and hopefully reach decisions they couldn’t have otherwise.
Ironically, Flynn says, it was members of a next-generation roundtable at the Construction Suppliers Association who helped persuade the Atlanta-based regional LBM association to create Legacy. “These younger folks kept saying, ‘Dad really needs this stuff,’” Flynn recalls. “[They said] ‘We can talk about transition and taking over, but you know, there’s another piece to this.’ ... Creating this place where people in this same boat can talk about challenges and fears and hopes and the nuts and bolts of what to do to make this happen has just been so gratifying.”
Valuable as Legacy is, it only meets twice a year, so if that’s the only time you have to break free and think longer term, there’s a bigger problem at your yard. As Fromme says: “If you don’t have a good team in place that can be on auto-pilot [and free you to do longer-term planning] then you’re in a bad spot. Just for wanting to grow—how can you focus on that if you’re so busy doing day-to-day stuff?”
Your best bet might be to hire a succession planning consultant, if only to bring some regularity to the process. Your accountant or financial planner might be able to provide a name, but Scott suggests you look beyond the obvious money-oriented job types, particularly if you have any fears that they’ll try to sell you stuff rather than help work through your problems.
Larry Gold, an Atlanta-based attorney specializing in succession planning as well as mergers and acquisitions, says the need to help owners sort out things is huge. “Most of what I do—and this is M&A writ large—is psychology,” he says. “You have to hold people’s hands and remind them of what this transition is all about.”
How to Pay Future Bills?
Gold says that half the time, he also needs to get his clients to think about what they’ll live on when they retire. Too often, small-business owners fail to set up and fund their own pension, counting instead on the business’ continuing revenue to fund them in their golden years.
Some LBM retirees who own the land where the store is operated hold that property in a separate company and then charge the lumberyard rent. It generally works so long as the store stays in business; a number of people who sold their operations to Stock Building Supply and then signed decades-long leases to Stock for the property came in for a shock when Stock went into Chapter 11 reorganization and got the leases canceled by a bankruptcy court.
Scott says lots of family businesses do well at including real-estate assets in succession planning, but they don’t think enough about holding more liquid assets. “It shouldn’t be stock in the company,” he says. “Often, it’s cash. You also can have more conservative types of investments: bonds and large company equities.”
Gold says he’s often seen problems emerge when the business is being sold, either to an outsider or someone inside, and the owner only then thinks about retirement income. “The discussion from the patriarch invariably is ‘I’ve got to have X amount because that’s what I needs to live on,’” he says. “What we typically try to do there is say, ‘Look, there’s no point in getting into a family debate over what it’s worth or what you can pay. Get an independent valuation.’ Then, if the father says ‘I’ll take it,’ you can structure the deal accordingly. If the valuation comes in and the patriarch says that’s not enough, you back away or you ... [try] to bridge the gap.”
Advise and Consent
You might also be tempted by the buyer’s offer to pay you as a consultant—someone who can give advice on the local landscape and introduce the new buyer to customers. In Scott’s experience, this works for no more than 18 months. “The seller keeps asking ‘Why did you change this?’ They don’t like change and don’t want to be part of it because they think [the new owner is] going to break what’s not broken. Or, they’ll go to the new owner and says ‘What if we do this?’ And the new owner says no. Then the seller feels rebuffed and rejected.”
Your post-retirement involvement has to be no closer than arms-length, Scott says. And rather than make it an open-ended deal, make it renewable after one year. Odds are, the new person in charge won’t need your help anymore.
CSA’s Legacy group plans to devote a session at one of its future meetings to what Flynn calls “conscious aging.” It addresses the emotional and physical issues of aging and how you can spend the last portion of your life in vibrant living. “Do you spend the last portion of your life dying, or do you do it living? It really is a choice,” Flynn says. “The role model for me around conscious aging is Jimmy Carter. It’s a reinvention process, because these are all Type A guys who’ve made it on their own.”
It’s a discussion that needs to occur, and for Flynn with her group, “the biggest surprise for me in this has been how ready people are to talk about this.” Are you?