Auto Service World
Feature   February 1, 2008   by By: J. D. Ney, Assistant Editor

Poor Planning Means Retiring Poor

Evaluating the Importance of a Succession Plan

As independent business people you’re no doubt used to the jokes that surround the sole proprietorship. Remarks about pension plans and companyprovided retirement funds are cute reminders that in your line of work, particularly as the owner, you’ve got to fend for yourself. There is even a requisite amount of personal pride in that fact. And all the joking aside, there really is not much worry of a pension, because you’ve got yours set up, and waiting to be cashed, right? The very business you own, and the eventual sale of it to a son, daughter or employee should be plenty to cover your retirement village condo in Boca Raton, shouldn’t it? Without a properly vetted succession plan, you might be surprised.

I’m going to take a flyer of a guess here and say that you right now holding this magazine, are 35 to 55 years old, you’ve been in the automotive repair business most of your working life and have yet to fully figure out what you’re going to do when you’re done. If you’re fortunate enough to be the owner of the facility in which you sit, congratulations, you’ve found just the right article for you. If you happen to be technician, then you’ve probably got some ownership aspirations of your own someday, in which case this article will be of great service to you later on as well. Of course, if neither of these sounds anything like you, then by all means, flip to Tom Venetis’ article on wiper blades and headlights. If however, a clean and financially stable exit for yourself and the profitable continuation of your business is important to you, you might just want to have a read.

Getting Started On a Plan

In order to give us a better idea of what might be involved in setting up an appropriately robust succession plan, we’ll once again turn to the experience and expertise of Doug Robbins, president of Robbinex Industries, a company that specializes in the sale of businesses. According to Doug, small businesses in general are woefully lacking when it comes to a properly vetted succession plan.

“I’d say about two per cent of small business owners have an adequate succession plan,” says Robbins. “Most owners are so involved in the day to day running of the business, working on average 68 hrs/wk, most simply don’t have the capacity at the end of the week. It just never gets done.”

Despite the lack of time most have to dedicate to planning for the eventual sale of the business, it is also an undoubtedly daunting and potentially costly venture, at least at first. However, it is often said that a journey of a thousand miles starts with a single step. According to Doug, establishing a meaningful and more importantly, legally useful succession plan for your independent service shop is really one of the very first steps you ought to take.

“I always say that you should be ready to sell your business one hour after you start it,” he says.

So, if you’ve been running your independent service business for 25 years, and you don’t yet have a fully fleshed-out succession plan, well, you’re some 24 years, 364 days and 23 hours behind schedule. Robbins also appreciates the demands placed on the independent business owner, both in terms of time pressures and finances, but insists that an exit strategy is worth the investment of both ASAP.

“There will always lots of reasons not to do it, and its always going to cost some money to set it all up,” he starts. “Not everyone has the cash sitting around, but I always tell people that they should budget for it. If you don’t have the plans set-up then you’re just going to pay the piper later, and it’s usually much more than the initial cost.”

After only a short while talking with Doug, the “piper” he is referring to becomes quite evidently the Canadian government. What’s more, the horror stories he can share when it comes to taxation on the sale of a business would be motivation enough for anyone to get started on setting up their own succession plan post haste, regardless of the difficulties.

Fortunately, Doug has some suggestions as to how to go about breaking that inertia. “First thing you need to know where you are,” he says. “Environmental factors, employees, inventory, equipment all need to be assessed. After that, you can determine what the likely value to a purchaser is. When we’re selling a business, we’re selling a person’s integrity and selling something that will profit in the future. The businesses that have everything in order all always the best kinds of businesses to sell.”

Part of that integrity, according to Robbins, is professionalism when it comes to the bookkeeping. While no one is suggesting that independent repair facilities run a shady business, some might note some broad business trends when it comes to the sole proprietorship.

“Independent businesses tend to have two cash drawers; one for the jeans and one for the business,” says Robbins.

While the legality of this reality is not up for debate here, and no fingers are being pointed, Robbins advises a good, honest look at your business, followed by some staunch accounting. In the end, he says, it will only help the overall sale value, and hence could been the difference between a healthy retirement, or working through your 75th birthday. “If you’re serious about selling your business, you really need to start counting everything for three to four years,” he says. “If the potential purchaser is afraid of your business, or doesn’t trust you, then the value he’ll place on your business will be much lower.” Make Sure You Actually Want Out: A Succession Case study from the Desk of Doug Robbins

Recently, a client approached us to sell his business, and what a nice business it was. The company had developed and outsourcing program for the manufacturing of its products from around the world: revenues were 15 million and the profits were 1.2 million. Sales had been growing at 15 per cent each year for the past four years and projections indicated the growth would continue at this rate.

When asked why a young man of 46 would want to sell at this point his entrepreneurial career, the answer was strange!

“I want to put may affairs in order and to settle up with my dad” further probing indicated there was no health issues; dad had been retired for the past four years; he and his father owned the business 50/50 and there were no conflicts with his father.

I arranged for Dr. Wolfe, our industrial psychologist to interview and test him.

As I suspected, he was suffering from acute burnout. At the valuation presentation I insisted both his wife and father be present. At the presentation, I indicated we would not take his business to market until he had taken at least a three-week vacation. The answer was he could not possibly be away from the business for more than a couple of days. His father offered to step back into the business for three weeks and his wife promised to find an island with no telephones or internet.

Six weeks later, I received a call from the owner who indicated that was the best advice he had ever received and he no longer wanted to sell.

Two years later, the sales were at $22 million and the profits were over $2 million.

Always allow time for yourself.

And One Last Thing

After you’ve taken some time for yourself, and are sure that selling the business is really what you want to do (assuming you’ve gone through all of the other steps, done your homework, and have a valuable and saleable business on your hands) Robbins has one final piece of advice: get professional help.

“It is very important to have competent advisers,” he says. “Make sure you have a CA you trust, and a specialized transaction lawyer, not just a generalist. Lawyers are like doctors, and for the sale of a business, you want a specialized transaction lawyer.”

With the proper legal and financial advice the sale of the business you’ve built can be a very profitable and enjoyable way to gracefully exit the industry. That said, it all starts
with the initial plan, and it all takes time. So if you’re part of that 98 per cent of independent businesses that lack a legitimate succession plan, you’re only robbing from your own retirement potential, so what are you waiting for?


Doug’s 10 Quick Keys to a Successful Succession

Be reasonable about the value of your business. Inflated expectations interfere with your business intermediary’s ability to negotiate the best value for you. Carry on business as usual. Don’t become so obsessed with the transaction that you ignore day-to-day demands. Your eventual buyer will need to see a healthy business, not one suffering from neglect. Keep the sale process strictly confidential. A breach of confidentiality surrounding the sale of a business can alter the transaction dramatically. Any potential purchaser looking at a business for prospective purchase must sign a confidentiality document. A corporate lawyer can prepare such a document for you. Prepare for the sale well in advance. Be sure your records are detailed and complete for at least the past few years, and do all pertinent legal or accounting housecleaning as well as a physical sprucing up of the plant or office. Anticipate information the buyer may request. In order to obtain financing, the buyer will need appraisals on all assets, plus information to satisfy any environmental regulations that may apply. Achieve the highest price through buyer competition. Since this can be tricky, you’re advised to let your intermediary, as a third-party, create a competitive situation with buyers to position you for the best transaction value. Be flexible. Don’t be the kind of seller who wants all cash at the closing, or who won’t accept any contingent payments or an asset transaction. Negotiate, don’t dominate. You may be used to being your own boss, but the buyer may be used to having his way too. With your intermediary’s help, decide in advance when to hold and when to fold. Keep time from dragging down the deal. To keep the momentum up, work with your intermediary, your accountant, your lawyer and other experts who may be required to be sure that potential buyers stay on a time schedule and that offers move in a timely fashion. Be willing to stay involved. Even if the process has been exhausting, realize that the buyer may want you to stay within arm’s reach for a while. Consult with your intermediary to determine how you can best achieve a smooth transition from owner to past owner.