Fear factor

No one can predict when a business can be struck down by tragedy. But fear of disaster is often not enough to make dealers implement a succession plan or exit strategy

When Vernon Rudolf, the pioneer of Kripsy Kreme doughnuts, died in 1973 in his home state of North Carolina, he left no succession plan for his family. As a result, the business had to be sold, and when it was finally acquired by Beatrice Foods in 1976, the Rudolf family lost its influence and with it its main source of financial support.

Similar stories of woe are all too common, particularly in the OP industry which is riddled with family-run dealerships. According to research from the American Institute of Certified Public Accountants, failure to plan for ownership succession is the greatest threat to businesses with sales of less than $3 million and the second greatest threat to closely-held businesses larger than that.

But, while 80 per cent of businesses in the US are family-owned, only 21 per cent have a written plan for succession. And in the event of retirement, disability, divorce or death, these companies can face serious financial and management crises, or be lost altogether to someone outside the family that the previous owner worked so hard to provide for.

Neglect

Mark Gentile at is.group describes the extent to which succession planning is neglected in the OP industry as "very high". "I have seen very good businesses go by the wayside because it was ignored," he says. "Many dealers don’t want to take the time to deal with the hard decisions associated with succession planning. They spend all their time IN their business rather than ON their business."

Michel Timmermans of wholesaler Timmermans Benelux claims to know dealerships in which the second generation have already been working for 25 years, the father is still in the business, and still there is no succession plan. "If the owner dies, decides to retire, or decides to sell, the other family members not active in the business will want profits to distributed fairly," he says. "It is crucial to draw up a plan as early as possible."

Similarly, Mark Austen of Office Club estimates that only around 5 per cent of the UK group’s member dealers have a succession plan or exit strategy in place. But there are exceptions of course, he adds. Two of Office Club’s largest members, Colemans and Osbournes, are now both managed by the second generation and doing better than ever, thanks to successfully executed succession plans.

Gentile adds that without a carefully crafted plan, the chance of a succession crisis is very high. "It leads to fighting, especially among family members and key employees, which means the business becomes side-tracked and loses market focus. At this stage the big boxes swoop in and buy it for nothing, dismantle it, and all the sweat equity invested over the many years is lost. Then the big boxes lose 50 per cent of the business in the first six months because they don’t give the same level of quality service that the independent has delivered over the years. I know – I have seen it first hand.

"Succession planning is like life insurance," he adds. "You’ll need it eventually. Why delay the inevitable-

But of course many dealership owners would not want to pass their business on to family, or maybe the children that have been reared for the takeover are simply not interested.

"It all depends on the individual dealer’s lifestyle and business," says Rick Needle, CEO of Integra Office Solutions. "We’ve got some obviously very successful dealers that regard it as a family concern and they want to try and pass it down from generation to generation. Other equally progressive dealers are building up their businesses with the prime objective of having a financially rewarding exit at some stage in the future when they can sell their business on. Yet other dealers are really just looking for a way out as they have nobody to pass it on to.

"But some sort of exit strategy is absolutely critical," he continues, "because unless you’ve got something in place, the business will just wither away. It is about grooming the business from an early stage. Every move should be about increasing shareholder value."

Options

Possible exit or succession strategies fall into five loose categories, according to Donald Hopp of Hopp Investment Advisors: the sale of part or all the business through an asset or stock sale (such as a management buy-out or buy-in); the sale or transfer of the business to a family member or business partner (with the levels of involvement of each individual accurately drawn up); the sale to an Employee Stock Ownership Plan (ESOP); an initial public offering (IPO); or the liquidation of business assets. "The latter is by far the worst option but unfortunately, this is what happens in most cases," says Hopp.

But regardless of exit strategy, it is also crucial for a company to get its financial and tax issues in order; organise financing arrangements; and conduct business valuations every few years. However, even if a company has had a recent business valuation, its value can plummet the day after the business owner dies if he or she has not planned for ownership and management succession.

And even when the business owner is still alive, selling can often be harder than many realise. Dealers often find that, after years of hard work, they are unable to find a buyer, even among related businesses and competitors. This is because small businesses are often worth more to the person who owns it than anyone who buys it. This is particularly the case if the owner has a personal relationship with customers and/or employees, who may leave the business if it is taken over.

"It can sometimes be more beneficial for the owner to work for another three years and then walk out and close the door than attempt and sell a business churning over a mere £20,000 a year that is never going to sell," says Austen. "This can be the case particularly in the UK where dealerships are smaller."

But at the same time, business owners have reason for optimism. In 2004, many independent dealers achieved significant growth through the acquisition of other dealers and resellers, and industry observers expect consolidation to continue in 2005, in the US in particular. Seven members of Integra sold their companies during the year to other Integra dealers, for example.

And although some of these firms were in financial difficulty, most were profitable businesses sold as going concerns because the owner wished to retire and reap the fruits of hard labour. Indeed, Integra, along with most other dealer groups, provides a register with the aim of matchmaking dealer groups in this way.

Hurdles

So, with so much potentially at stake – and so much assistance at hand – why do so many organisations fail to implement an exit or get-out plan? Kim Leazer at US dealer Forms and Supply believes the reason for this is often emotional. "I think succession planning is often neglected or avoided because it makes us face our mortality, which can be difficult. This I think is the case in most family-run businesses; no one wants to talk about death."

Austen believes it is because many independent dealers see their business as a lifestyle choice, not as a means to acquire wealth. "Independent dealers have the flexibility to take time off to play a round of golf in the afternoon if they feel like it, they enjoy a certain status in their community, and they earn more money working for themselves than they would working for an employer. Many independents are not building the business to sell or pass on and don’t consider a succession plan."

If owners planned early for an orderly transfer of their businesses, they could reduce the amount paid in taxes, get the maximum value out of the business, and be assured that it will be left in the hands of chosen successors in the event of a crisis. If only Mr Rudolf Vernon had done some forward thinking and contacted a financial advisor before his death, the Vernon family could today be sitting on a large and tasty fortune.