Published in Finance
Former investment banker James Wiese, who acquired Grand Rapids-based American Storage and Logistics Inc. last year, encourages business owners to make a full disclosure on the state of their companies during any sort of transition or succession process. Former investment banker James Wiese, who acquired Grand Rapids-based American Storage and Logistics Inc. last year, encourages business owners to make a full disclosure on the state of their companies during any sort of transition or succession process. PHOTO: Katy Batdorff

PLAN EARLY AND OFTEN: Advisers say business succession, transition takes years of prep

BY Sunday, March 31, 2019 10:03pm

Craig Hecker had thought about his eventual departure from his family business for a decade or more.

A few years before he sold, he began preparing. He spent time “making sure everything was up to date and in good shape,” and even paid off the company’s debt.

In November 2016, a year and a half after he began actively seeking a buyer, Hecker sold the assets of Ferguson Supply Co. — a fourth-generation supplier of industrial, plumbing and heating parts that began in 1901 — to Standard Electric Co. in Detroit, another family-owned company with a long history.

Now working part-time as a consultant for Standard Electric, the 66-year-old Hecker would advise business owners to prepare for their company’s transition well in advance of their inevitable departure, especially if they lack a next generation that wants to take over the business.

“If you’re transitioning a family business to another corporate entity, you can never plan too far ahead,” he said. “Planning is the key and all the pieces that go with it, financial and legally. There are so many steps involved.”

His advice echoes that of professionals who work with and advise business owners. They urge owners to start planning well in advance for the business transition and their personal exit. Giving that exit plenty of runway results in a smoother sale and enables the owner to get more value.

Legal and financial advisers say few business owners plan well ahead for their exit and their company’s transition, or they wait far too long, sometimes right up until they’re ready to go, hurting their chances of getting good value from a sale.

Succession and transition planning often gets lost in the day-to-day aspects of running and building the business, advisers say.

“My experience has been it’s like a lot of experiences in life that we all know we’re supposed to do … but it’s easy to get caught up in your daily grind and daily routine. It’s at least as much so in running a business,” said Eric Larson, a partner at Grand Rapids-based accounting firm Beene Garter LLP.

“There’s just always something to take your attention from these longer-terms things, and dealing with that can be complex,” Larson said.

‘A big deal’

Yet amid the daily grind, owners need to find ways to give some thought to their eventual exit. “Early and often” is the mantra many advisers cite when it comes to business succession and transition planning, although not many owners actually take that advice to heart.

Brooks Kindel, a consultant with the Michigan Small Business Development Center, works with business owners on succession and transition planning. He recounts the story of a husband and wife who owned a business and one of them “all of a sudden decreed, ‘I want to retire and I want you to retire with me, let’s sell the business as soon as we can.’”

“And that’s not untypical,” Kindel told MiBiz. “This isn’t something where you wake up in the morning and decide to sell your business and do it. That’s not the way to do it.”

To help owners who want to prepare in advance, the SBDC developed a workshop it hosts throughout the year on how to buy and sell a business. The program emphasizes succession and transition planning.

“A lot of business owners come to that and realize that ‘wow, this is a big deal.’ It’s the largest financial transaction of their lives,” Kindel said. “One of the things we talk about is if you’re a business owner, you should always be prepared to sell and do the things you need to do to have your business ready to sell.”

Advisers say one of the first moves business owners should make to transition their company is to assemble a good team of legal and financial advisers to help guide them through the process, plus identify an investment banker who can represent them in the market.

Kindel recalls a comment he once heard at an Association for Corporate Growth meeting that “you should hire the best advisory team that you can barely afford.”

Asking questions

Advisers can help business owners think through a fundamental question up front: What, exactly, do they want out of a sale?

Owners need to consider whether they simply want to get as much money as they can from a transaction, or if there are legacy issues such as what happens to employees that they want to address as well. Owners also need to decide if they want to remain with the business in an advisory role for an interim period after the sale.

There are also tax implications to consider. Planning ahead and including a good tax attorney and estate planner as part of the advisory team can minimize the tax liability after a sale and play into how a transaction gets structured.

There’s another big personal question that needs to get answered as well: What will the owners do after a sale when they’re no longer running a business?

“Leaving the business is going to leave them inherently with a different life,” said Nick Reister, chairman of the trust and estates group at Smith Haughey Rice & Roegge PC, a Grand Rapids-based law firm.

Making a major life change and selling the business requires time for thoughtful consideration, according to advisers. That’s why business owners need to begin the planning process well in advance and decide early on what they want or need out of a sale.

Advisers say a business owner should start planning at least three to five years before they’re ready to leave. As well, they need to prepare employees and their management team for the transition.

“When people say, ‘I’m leaving in a month or six weeks and I need to do this so I can head to Florida,’ they’re really setting themselves up for failure and being irresponsible with what is probably their most prized position and perhaps their most significant asset,” Reister said. “When dealing with something you’ve built and owned for quite some time and you’re trying to transition it to folks who will be new to ownership or new to control, you can’t expect it to happen overnight.”

Update everything

By planning well in advance, business owners also can better prepare employees and managers for the transition, increase the company’s value and improve their chances of getting what they want out of it.

Owners should make sure their corporate and financial records and other documents — such as employee handbooks with job descriptions, policies and procedures — are in order and up to date.

Keeping those documents updated “shows there is institutional knowledge that is down in black and white that can be passed down to new ownership,” Kindel said.

Larson at Beene Garter suggests that business owners preparing to sell should consider paying down or paying off debt on the balance sheet.

As well, they should address any lingering issues with employees or managers, or perhaps a problem client. Other critical actions include getting uncollected receivables off the books and identifying obsolete inventory or equipment to “get it out of there,” Larson said.

If Hecker had to do it all over again, he said he would have “spent a little more time” when selling Ferguson Supply Co. to liquidate obsolete inventory that the buyer was not going to purchase.

Larson likens the process to staging a home for sale to give it curb appeal.

“You need to do the same thing with your business. Get rid of all the clutter and the garbage,” he said.

If a business owner has a son, daughter or other family member on the payroll who doesn’t contribute much to the company, “maybe it’s time for them to move out on their own,” Larson said.

Attention to detail

Above all, advisers recommend that business owners planning to sell and exit their companies need to commit to full transparency and disclosure. Not identifying an issue or potential problem up front for a prospective buyer can lead to more trouble down the line.

“If you have some weaknesses you know you need to deal with, now is the time to address that because a prospective buyer, when they do their due diligence, they’re going to look for and find all of these warts. For each one of them you have to explain, you’re going to get dinged on price and it’s going to add to the frustration and length of the transition process,” Larson said. “So being able to give a potential buyer a clean package of your financial information and something that looks like they can see themselves stepping into, the easier it is.”

That’s exactly the advice former investment banker James Wiese offers to sellers.

Buyers don’t like surprises, said Wiese, who a year ago acquired American Storage and Logistics Inc. The company employs 15 people and designs, installs and sells material handling equipment and systems.

The closer a seller can get to full disclosure of a company’s condition and performance and the more documents they make available at the onset for a potential buyer to review, the better the chances for a smooth transaction and transition of the business to a new owner, Wiese said.

“The more you see a process in place, I would expect the faster a company’s going to sell and the quieter you can sell it. So from a seller’s perspective, you don’t want any interruptions of things,” he said. “The more information that’s up front … it makes the buyer feel better because, ‘Wow, they’ve thought through this.’ It makes it more likely you don’t have a deal blow up at the last minute.”

Wiese recalls situations from his time as an investment banker when a deal got negotiated, “and then they unveil more of the documents, and there’s a bomb in one of the documents.”

“Someone’s going to find that bomb either before the deal closes and walk away, or after the deal closes and sue you. It just makes more sense — just get it all up front at the beginning. Take one lump of pain now rather than five lumps of pain,” he said. “If you want the buyer to do everything they say they’re going to do, just put all your cards on the table.”

Finding the right buyer

Early on in the planning process, owners should give consideration to who would want to buy their business, especially if there’s no next generation in the family who wants to take over the company. Competitors and managers are potential buyers, as are private equity investors and strategic buyers. Owners also can consider an employee stock ownership program, or ESOP.

“This is your baby. You spent so much time nurturing this baby. You’re giving this business up to somebody,” said attorney Bryan Reeder of Plachta, Murphy & Associates PC in Grand Rapids. “You want to make sure it’s going into the right hands.”

In looking at a next generation family member who wants to take over a family business, advisers suggest first having them work elsewhere to gain knowledge and experience. When they return and go to work in the business, mentor them over a period of years to prepare them to run the company.

The same goes if there’s a manager or group of managers who want to acquire the company. Owners can get them ready by increasingly delegating responsibility and authority over a period of years prior to the final transaction, advisers said.

“Put them in the right position so it will increase the likelihood of them being able to purchase the business and succeed you as the owner,” Reeder said.

John Porterfield, regional president for Comerica Inc. in Grand Rapids, suggests that owners include a clear timetable for a family member deciding to buy the business or begin acquiring shares “so you don’t let it just linger without the certainty of who’s going to take this company over.”

By a certain time, “they need to commit to the fact that they want to buy into the business,” Porterfield said.

While there are many things a business owner can do to prepare their company for a sale, advisers say they need to make sure they’re personally prepared to step away as well.

Advisers speak of instances in which a business owner had second thoughts at the last moment when a sale was set to close, or had seller’s remorse after a transaction.

“Naturally, it’s hard for business owners to walk away from their business,” Reeder said, particularly if they’re unsure what they want to do next in life.

“It’s a bit of a leap of faith for them. They don’t know what they would do if they’re not doing what they’re currently doing now,” he said. “You poured your blood, sweat and tears into a place and then all of a sudden…”

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