By Bob Clements
If we have learned anything from the last couple of years, it’s that small businesses are the heartbeat of the economy. As a matter of fact, according to a 2009 report from the Small Business Administration, 99.7 percent of all the companies in the United States are small businesses and those companies accounted for 65 percent of all the employment growth from 1993 to 2009.
Another interesting fact is that 70 percent of businesses that start up will not survive for more than 10 years. So, if your business is more than 10 years old, you have already beaten the odds. The unfortunate down side to those numbers is that for those who do survive the first 10 years, only 30 percent will survive into the second generation and only 10 percent will be around to continue into the third generation.
So, why is this important, and what does it have to do with running a successful dealership? Well, if you think of all the time, energy and effort you have invested in your business, the probability of it surviving you is pretty slim. Given the hard work that it takes to make a dealership successful, making sure it survives would seem critical for any owner, so why is so little attention paid to succession planning?
You’ve built it — now take care of it
The reality of business is that, sooner or later as an owner, you are going to have to deal with what happens to your business when you are ready to retire and enjoy the life you have worked hard to achieve. Keep in mind that retirement isn’t just a matter of deciding not to go into the store any more. Aside from making sure that you have enough money to retire on, the whole question of what happens to the business becomes critical. At some point, you are going to have to decide who’s going to manage the dealership when you no longer work in the business. You will need to determine how the ownership of the business will be transferred. Will it go to a family member or an employee, or will you sell it to someone on the outside?
If you are planning on transferring the business to family members, then the first thing you need to do is take some time and make an honest appraisal of what the business would really mean to the family members that you want to own and run the business. Do they see it as just a way to collect a paycheck? Do they resent it because of the amount of time that it consumed you? Or, does it represent the good times and memories of a family that struggled and grew and had fun? The attitudes of the family members will create very different succession plans.
By taking time to have discussions with the people who will ultimately be making decisions helps you create a succession plan that everyone involved can support. Keep in mind that as the owner, you still have the final decision on what will take place, but by getting everyone involved in the beginning, you have the ability to have direct discussions with everyone involved on how you want the business to be handled. There would be nothing worse for your business than to have your family find out who owns the business and how it is to be run at the reading of your will. I can think of no greater way to break up a family.
Remember, the main purpose of a succession plan is to work toward managing those issues in advance, so there will be a smooth transition between you and the potential future owners.
Focus on the basics
As you begin to think about putting together a succession plan for you business, it will help if you take a sheet of paper and break your future business down into four sections:
What’s it worth?
Who is going to own it?
Who is going to manage it?
How are the taxes going to be handled?
What’s it worth?
One of the first steps in creating a succession plan is to begin to put a value on the business itself. There are a lot of ways to create a value. At Bob Clements International, we have a set of calculations we use for OPE dealers that puts a heavy emphasis on labor and parts sales and a lighter emphasis on wholegoods. We separate the property from the business and create a valuation based upon those factors. If you would like to talk with us about doing an evaluation for your dealership, e-mail me at firstname.lastname@example.org and I will have one of my people contact you.
Once you know the value of your business — less the property — then you have a starting point for determining what your options are from an ownership standpoint. If you have a family member that would like to have the business but doesn’t have any money, then you need to start thinking about how you can help to make that happen by either letting that person make payments to you or by working out some arrangement with your banker.
If you decided to sell it to an outside buyer, then you have a fair market value established and can have a broker look for a buyer when the time is right. If you want to turn your dealership into an employee-owned company, then you know what the stock is worth and can let them start buying in when the time is right.
Who’s going to own it?
For most of my dealers, the person who ends up owning it will also be the one who ends up managing it — but that’s not true in all cases. Management and ownership are not always the same. For instance, you may decide to transfer management of your business to just one of your children but transfer equal shares of business ownership to all your children, whether they’re actively involved in operating the business or not. Again, you may decide to turn your dealership into an employee-owned business and the employees will create a leadership structure based upon the amount of stock that each owns. It’s important to spend some quality time thinking about exactly how you would like the ownership structure to be. I know a lot of dealerships where the son or daughter would do a great job taking ownership of the business and just as many where it would be a disaster.
Who’s going to manage it?
If you want your family to own the business but don’t want them to run it, then you have to spend the time to make sure you have good management in place. Many dealers believe that no one can run their dealership as well as they can. If that were true in other businesses, there would only be one McDonald’s and it would have closed when Ray Kroc passed away.
It’s up to you to work to train a manager so that your business can flow smoothly from your hands into those of your family. If a son or daughter is going to take on the leadership role, it is critical that he or she begins to learn all of the processes that take place in all aspects of the dealership. From washing down and setting up equipment to ordering parts and wholegoods, the time to learn is when you are still around to teach. Nothing will make good employees abandon a company faster than a son or daughter who doesn’t have a clue as to what is going on in the business. You put sweat equity into the business — make them sweat and bleed a little for it too. They will develop a deeper appreciation for you and more of a passion for the dealership.
How are the taxes going to be handled?
When you start looking at the tax side of the succession plan, you are focusing on minimizing the tax liability on the business in the event of your death. You want to get a tax attorney involved in this stage of your planning to evaluate asset transfer tax strategies that will help you freeze the value of your interest in the company while you transfer ownership to your children.
Most of your options will depend on how you have structured your dealership. You want to spend some dollars on advice for people who make their living doing these types of things. Your goal is to protect the assets of the business and avoid paying unnecessary taxes.
If you’ve been putting off succession planning, make a commitment to get started on it during this upcoming slow season. Although it is not an easy process, it is an important one and will have great value when the time comes to make the transition.
Here are some final thoughts as you start moving toward creating your plan:
The earlier you start the process, the smoother the transition will be when the time comes to transfer the business.
Make sure your family is involved in the process. Putting together a plan and then announcing it to the family is a sure way to create conflict and potentially split your family apart.
Be realistic in appraising your family member’s skills and abilities. I have one dealer whose daughter is heavily involved in the business and whose son uses the business as a way to collect a paycheck. As much as the father would like to have his son and daughter work together to run the business, it’s not a good idea. The business should plan to help the daughter buy her brother’s share when it’s time to make the transition. If not, the daughter will end up getting frustrated with her brother and walk away from the business, and the son will drive it into the ground. You may find that no family member is capable of running the business and the best option will be to sell it to an outside interest. Your goal is to examine the strengths and weaknesses of everyone involved and make the best decision for the business.
Begin spending quality time with those that are going to be running the business. How can you expect someone to take over for you if you haven’t trained them on what to do? Get them involved as soon as possible with your banking connections, your vendors and everyone else they will need to know to make the business successful.
Get connected with professionals that can guide you through the process. We work with our dealers’ attorneys and accountants to help with business evaluations and business structure. Don’t think you have to do this on your own, and don’t think it will cost a fortune to put a plan in place.
Creating a good succession plan will ensure that you have the money you need to retire and that the business you have built will continue to grow and prosper long after you are gone.
Bob Clements is the president of Bob Clements International, Inc., a consulting firm that specializes in the development of high-performance dealerships. His organization works hands on with dealerships throughout North America, helping them attain the personal freedom and financial wealth all owners strive to achieve. For more information, contact Bob Clements at (800) 480-0737 or email@example.com or visit his Web site at www.bobclements.com.