SAN ANTONIO — Transitioning out of a business can be as complicated as building it.
“The rule of thumb is to start planning three to five years before you want to make that transition,” said Christopher Goebel of Crossroads Advisers in Cleveland.
“The process works on preparing the business and business owners to face the eventual succession to someone who is a family member or someone who is in the business, or exiting it altogether,” said Goebel, who spoke at the Motorcoach Expo 2018 Solutions Session, “Preparing the Next Generation to Run Your Business.”
Eva Hotard, president and chief executive officer of Trailways, who also spoke at the session, said every business owner should work diligently on making that company a well-oiled machine.
“You just can’t wake up one day and say, ‘I’m tired. I want to sell it.’ What are you selling? It has to be a strong, smart company,” Hotard said.
Goebel spent 30 years in his family’s business, Lakefront Lines, which was sold in 2008.
Hotard worked for 27 years with her family’s Hotard Coaches, continuing to serve as president and CEO after it was sold in 1999.
Generational transfers face unique hurdles, Goebel said.
“Fewer than 7 percent of family-owned businesses survive a second generation or transfer to a third generation. The second generation maybe didn’t run it properly and it is not worth transferring. The second generation might sell the business or it is merged or rolled into a strategic buy with another company,” he said.
“A lot of the time they don’t have the people in the family to pass the business on to. It is one of the problems we are facing now in privately held or family businesses in general. There are quite a few of the next generation who don’t want to be involved and take all the time to run the business. They saw what their parents or other family members went through and they back away.”
Deciding which of the children, if any, are suited to run the business “can be very painful for the business owner,” Goebel said. “You need to look at your children, or whoever you are transferring the business to, to make sure they are in the right positions.” The love of a parent is a huge roadblock to making objective decisions on your own child’s competency, Hotard said.
“We worked with an executive coach for a couple of years to help us make sure the business was running like a business. If the family owns the business you are not subject to some corporate manager so most of the time family businesses are not too tough on their own members. Our coach used to ask, ‘Are you playing in the sandbox or serious about this business?’”
Continuing education should be required of all family members in the business, she continued.
“Family members working in the business may not have all of the experience of the CEO, who could be a family member or not. A CEO has to be good at 32 different traits. How in the world are you going to achieve that unless you are constantly on the learning path? In this business everything is changing at lightning speed.”
Goebel advised business owners to build a team of experts to guide the transition. The advisory team likely will include a lawyer, accountant, insurance manager and wealth planner.
The coach also should address family issues, Hotard said. The coaching process might encourage the owner to stay for a while.
“If you are selling out of frustration or because the family may not be getting along, a third-party, objective person can mitigate the family dynamics. You want that decision to be extremely well thought out and not an emotional one,” she said. “It is a very difficult decision, because when you sell it, it is gone.”
After determining the future management structure, the owner should address personal wealth ramifications, Goebel said.
“They want to make sure they are able to take out the net worth they have built up in that business so they can maintain their standard of living. Most owners look at the proceeds from the business as their retirement savings,” he said.
If the owner will be paid for the business over time, “It is critical to have the right management in place. They have to make sure the business is going to survive long enough to pay the owner back over time. If the new ownership messes up, the owner may be left out in the cold or maybe have to come back to run the business,” he said.
Lining up the succeeding management team is part of what Goebel called “de-risking the business.”
“The value of the business is going to be based on the perceived risk the buyer is going to have. From operations to accounting to finances, all of those areas need to be improved,” he said.
About 80 percent of businesses are not transferable, he continued, “sometimes because they are very risky and the owner hasn’t done things to make the business more valuable. About 30 percent of businesses will never transfer because the owners have no desire to transition them.”
Exiting owners should consider the personal effects of the transition, Goebel said.
“There is going to be a time gap they have to fill, plus an identity gap. They get a great deal of self-identity and worth from that business and they need to develop other things to fill that. One interesting statistic is that 75 percent of the people after one year regret selling their business because they didn’t plan for what would happen to them.”