We asked jobbers that when planning succession, should family members take over or should you sell your jobber business?

For this topic, we needed to speak with jobbers who owned their own businesses, so we touched base with Dave Elliott from Wallaceburg Auto in Ontario and Douglas Squires from Colonial Auto Group in Newfoundland/Labrador to get their thoughts about the topic. Both had some great points. Judge for yourself and maybe learn something from their answers even if you’re not at the point of thinking about passing on your store to the next generation or a buyer.

What do you think jobber store and business owners need to consider when beginning a succession strategy?

Dave Elliottt: You need to figure out what retirement looks like to you and then find a willing party that will provide that to you. Planning is the key—involve your Accountant, Lawyer and Investment Advisor—your bank and life insurance agent might also be involved. Will it be an asset sale transitioned over time, or will it be a share sale, as the tax implications are different for each. It will take a team to get the deal completed. Write down what you feel is the perfect deal and timeline, and then try to find that. There will always be compromises however, when buyers and sellers negotiate.

Douglas Squires: The first thing to identify when building a succession plan is who your successor is most likely to be, either an internal candidate, a family member, or an external individual/company. Even after selecting your preferred candidate, it is important to maintain other options in the event your first choice does not work out. You also need to determine your timeline for departure as this will dictate when you need to start the transition process. You will also need to consider how much training will be wanted/needed by your successor as this will impact your timeline. Your retirement needs in relation to the company’s value and how these impact on each other is also key.

Where do you think these plans can often fail or not work as intended and what are some of the reasons why? 

Dave: I think there may be a difference in opinion of the value of the business or the terms may be unreasonable. From what I have heard communication seems to be the main concern—lack of written communication about the plan. The more the buyer and the seller can agree to before involving the professionals, the more likely the deal will succeed. Talking through the issues is important. The Plan needs to be written out and then scrutinized by your lawyer and accountant. The Plan has to be acceptable to the sellers and sustainable for the buyers. A wise man said that communication is the cause AND the solution for all of our problems.

Douglas: Succession strategies fail due to insufficient advance planning. A succession plan will typically focus on one individual or one company, yet many things could prevent a chosen successor from taking over such as a lack of aptitude, changes in a successor’s personal life, or unexpected external factors. By starting early, continually updating the plan, and considering contingency plans, an owner can put themselves in the best position to ensure they will have a successor when it comes time for them to leave the business.

What do you feel is important if you plan to hand over the reins to family members and ensure a successful transition of ownership? 

Douglas: The most important thing to establish early is the ability and aptitude of the family member to succeed. They need to understand what success entails and be prepared to put the work and effort into succeeding, as birthright is not a guarantee of success nor ability. Tied to this is an early identification of problems or shortfalls to ensure all key elements of operation are covered. The successor may not be as good a leader or there may be areas where they will need help, and it is important to ensure all gaps are covered either internally or externally. The best way to identify whether the successor can do the job or where they may need help is to have them work alongside the owner for a few years to allow for training and issue identification. However, for this to work, the owner must be willing to relinquish some control of the business and become a mentor because if too much control is maintained for too long, the successor may not learn everything they will need to do it on their own.

Dave: There must be a clear understanding of “The Plan” which is what transition in a family business essentially is. Empathy is important. The seller needs the plan to work, as it usually represents a significant part of their retirement. However, the seller needs to look at the plan from the buyer’s perspective. “The Plan” has to be sustainable for the buyer in order to be able to fund the transaction and for the business to remain sustainable. This is not always the case when the buyer is a “stranger” —however a family plan needs to make sense financially and socially in order for everyone to continue to get along. A deal that is not sustainable can ruin family relationships and can lead to legal action.

What steps do you need to take to protect yourself and the business during the transition period including related to legal and financial aspects?  

Dave: Everything needs to be clean or disclosed. Outstanding issues that you might not be proud of need to be disclosed and more importantly, everything needs to be clean.  By clean I mean—the inventory on hand matches computer records, assets are properly accounted for and depreciated, there are no tax arrears and personal expenses are allocated properly. Make sure your financial statements and corporate minute books are accurate and up to date. A buyer will scrutinize your business like a home inspector scrutinizes a prospective home sale.

Douglas: The easiest way to protect yourself and the business is to plan well at the start by ensuring the successor is a good fit to continue the business. Next you must engage external advisors such as lawyers, external accountants, and your lender. There will be many complex legal and tax issues with a sale and engaging competent advisors at the start will improve the chances of a successful transition that protects the outgoing owner, the successor, and the business.

Another major factor is determination of value and how the sale is structured. Using a CBV removes the emotion from the situation and allows for a fair valuation upon which everyone can agree. The structure of the buyout is important as sale proceeds are often the largest source of retirement income for business owners. Will the value be paid in full upfront, over several years or a mix of upfront cash with termed payments. If the payout is over time, then the success of the business will be imperative to ensure the outgoing owner receives their sale proceeds. They will need to consider this when identifying the successor and structuring the buyout.

It will also be important that the business has sufficient capital after the buyout as undercapitalization is one of the biggest killers of small businesses.

If family members aren’t interested and you need to seek out new buyers or consider a corporate purchase the business, what do you think is key to making this work successfully? 

Douglas: The key to having a successful sale to an external buyer is the identification of a like-minded buyer. This can be achieved by using a firm that specializes in business transitions, consulting with your professional advisors such as accountants, lawyers, and your banker, all of whom may have contact interested in the business. Realistically, in the aftermarket, it is unlikely that someone from outside of the industry is going to be the most likely candidate, so relying on your industry connections may be the most effective method of selling. By networking and having a good understanding of the key industry players who are in the region, you will be more successful in finding a potential suitor.

Buyers will obviously be most interested in strong financials but ensuring the business can continue without you is equally as important. If your business is primarily successful because of you and your relationships, it will not be as valuable once you have left. Continuity of management and staff after you leave will also make it much easier for the buying party to take over and reduce the risk of losing sales and value with your departure. You need to show the buyer your customer relations will be maintained after your departure.

Dave: I think you could start by putting together a presentation on what you have to sell. A small binder with pictures and a description of your business —a little history, 3-5 years of financial statements. Some accounting firms have succession specialists in their firm. There are sales agents that only work with buyers and sellers of businesses. There are business evaluation specialists. Whatever you can do to help the prospective buyer to understand your business will ultimately help you.