Autosphere contacted jobbers regarding Succession Planning.

Stephen Squires, Douglas Squires and Dave Elliott shared their insights on the topic.

AS 1: What do you think is essential for the successful transfer of ownership of an auto parts supply business today?

AS 2: How should you approach the succession plan with family members to ensure a smooth transition?

In answer to the first question, Dave Elliott had this to say: “Understanding what your business is worth and then finding someone who will pay you that for it. Your business should appreciate each year as you increase EBITDA (earnings before interest, taxes, depreciation, and amortization). Increasing assets (like inventory) and equity is fine but you need to value your business each year, or at least every five years.”

Stephen and Douglas answered the first two questions as one: “The most important thing to ensure a smooth transition with family members is to plan well in advance. The family members should spend time working in the business to see if they enjoy and are willing to do the work involved as well as to see if they are capable of running the business. Not everyone is suitable to own a company and it is much easier to adapt if you find this out prior to transitioning ownership rather than after. If you start early and find out the family member is not a fit, then it will give you time to adjust your plan and find someone else who would be suitable for the role or find someone outside of the family who is interested in the business.

“Another important factor is ensuring that there is open communication between all parties. Everyone involved should participate in making the succession plan and understand what it entails and what the timeline will be. It is also important to communicate the work involved in running a business and make sure the successor understands what they will be doing once they take over. Unlike being an employee, you cannot go home and completely ignore the business; as an owner, you will always be on call and must work more hours to ensure operations run smoothly.

“Included in open communication is consulting with accounting, legal and finance professionals in the planning. The sale of a business is often the funds that someone will use in their retirement, however, a younger family member may not have the financing available to buy the company outright. It is important that everyone understands how the transfer will take place from a monetary perspective and what that monetary value will be as this will impact the risk that a successor is taking on and could impact their interest in the business.

“After considering the above factors, it is also important to continually adjust the plan to reflect any changes that may occur. There are many things that could impact the transfer, whether it be on a macro level where something like taxation rules change, or a micro level where the successor’s interest in the business changes. You need to constantly evaluate your plan and adjust where required.”

Dave: (regarding Question 2) “The plan should lead to the family members fully OWNING (having fully paid for) the business in the agreed upon period of time and for the price agreed to. If your succession plan involves family members—regular family meetings are essential—these can involve your accountant and lawyer. Make sure everyone is on the same page. Start sharing the financial performance of the company as the purchasers will have to perform at a high level in order to pay you for your business, on top of earning a living for themselves.”

AS 3: If family members are not interested in taking over, how should you position the business to appeal to qualified, outside operators?

Dave: “There isn’t an Auto Parts Store Sales and Purchase Hub where prospective buyers (local and otherwise) can see what is available to purchase. You sell parts every day—but you only sell your parts store(s) once. Talk to the professionals—your accountant and lawyer can help direct you to market your business.”

Stephen & Doug: “If there is nobody within the organization or family who has any interest in the business, it will be important to identify who may have interest outside of the organization. Outside of someone who has expressed interest locally, the most likely purchaser is an existing jobber company. It is important to identify who the players in your region are and who may be interested in purchasing the company. The companies already in your market will likely dictate who may have an interest as someone you are directly competing with in your market may have less interest than someone who would be entering a new market. Potential suitors could be national public companies or regional private companies.

“Outside operators will of course be interested in strong financials and market ownership. However, there are other items that will be of interest to them as well and it is important to position yourself in a way that will make your company more attractive to them. Any company already in the industry is going to have headquarters elsewhere. This means that once you leave, they will need someone to run the store. It will be much easier for a new company to maintain an existing manager or promote a capable person internally than trying to hire outside your organization.

“Further, the new company will likely want to maintain some continuity so staff who have been with the company for a good amount of time will be beneficial so that customers feel like they are still interacting with the same company that they always have. While internal continuity is important, making yourself available to remain with the company for a period will likely also be desirable for an outside company. Customers like to see continuity and making yourself available for the new owner to learn everything about your business will prevent potential problems from arising that you know of but they may not. Many owner-operated businesses have a lot of their value tied up in the owner as they are the face of the business and are who customers are likely truly buying from. An ability to ensure customers continue to buy after a sale will help alleviate potential concerns from a prospective buyer.

“It is also important to communicate timelines with potential outside buyers. If you hope to leave the business in the coming years, generating interest ahead of time will help find potential buyers when you are ready to leave. While you may not have contacts with potential buyers, given the nature of the industry you likely know someone who does. Speaking with supplier representatives can help you let the relevant players know that you will be looking to sell to an external party in the future. These representatives will likely have a good idea of who in the market may be looking to expand and convey this information to them.”

AS 4: How do you feel assets and staff should be factored in when successfully transitioning the ownership of an auto parts business?

Stephen and Doug: “Keeping staff informed of plans can help to successfully transition ownership. Staff will be concerned with whether they will still have a job after a transition. If the successor is internal or a family member, allowing them to spend time in the business and get to know staff in advance of a transition can alleviate concerns. Showing that there will be continuity in the business after your departure reduces the risk that staff may feel they will not have a job once you leave.

While selling to an outside buyer does not allow a slow introduction, communicating with staff what is happening and reassuring them that they will still be needed will be important. From an outside buyer’s perspective, after purchase, they should quickly meet with staff and allay any potential concerns while also showing them that you care about them and intend to work with them into the future.”

Dave: “There are two main values in a parts store: assets, equity and EBITDA. The assets are huge (and growing) compared to even 10-15 years ago, so you need to get paid for your assets. Equity is simply (assets minus liabilities) so the higher your assets and the lower your debt the more cash you will get when you sell your business. EBITDA is the financial measurement of the performance of your business—but your staff is a big part of influencing that number. A high-performing staff will greatly increase the sales at a parts store.

So a store that has a good staff will likely have a higher EBITDA as they strive for higher sales, higher margins and a better customer experience. Staff can steady the business during a transition. They know the day-to-day and people-to-people workings of the business, and this is key during a transition, this is especially important in being able to offer your business to an “investor” if need be, who does not necessarily come from “inside the industry”, but one that sees a good business to invest in. This kind of owner would rely heavily on a competent and experienced staff.”