Success strategies for succession planning
Chris Cimaglio, CEPA and certified value builder, will dive deeper into succession and exit planning and value building at The Garden Center Show, taking place Aug. 8-10 in Milwaukee, Wisconsin. The Garden Center Show for independent garden center (IGC) owners and professionals brings together thousands of retailers and hundreds of exhibitors showcasing the latest products, services, and equipment for your IGC. For more information and to register, visit gardencentershow.com.
Lawn & Garden Retailer is the exclusive media sponsor of The Garden Center Show.
“By failing to prepare, you’re preparing to fail.” This familiar quote from Benjamin Franklin is especially true when it comes to succession and exit planning for your business, says Chris Cimaglio, certified exit plan advisor (CEPA), and Managing Partner of BEST Human Capital & Advisory Group and PivotPoint Business Solutions.
So how early is too early to start preparing?
“We always like to start at least three to five years before they’re ready to exit the business, but we have several clients we work with that are 10 or 15 years out, and some who want to exit within a year,” Cimaglio says. “Start as soon as possible. Even if you’re 10 years out, it’s never too soon to start.”
He says it’s important to have a plan for growth when planning for succession — even if you don’t think you need one because you’ll be selling the business. He recommends increasing the value of the business so owners can leave when they’re ready and on their timetable— even if they have someone to leave the company to.
“We all have to act someday,” he says, “but we want to keep building value in our business because that will increase our return.” Cimaglio says to consider the business as the product to ultimately be sold, “and if you can improve your operations, increase your margins, increase your return, increase your EBITDA [earnings before interest, taxes, depreciation and amortization], you’ll increase the value of the business — and get a better return.”
He says many owners tell him they don’t need a plan for growth because they will be retiring in a few years. He tells them that a potential buyer will be looking for a growth plan and will want to know that they can grow the business in the future. Strategies such as other product lines or programs could be put in place to increase customer loyalty and build recurring revenue.
“You want to get a higher return,” Cimaglio says. “Do you want to put your business up for sale today, or do you want to take these steps to increase the value and your return on the business?”
Business Planning for Succession Planning
“A lot of what we do is not just preparing the owner personally, business-wise and financially for their exit, but strategic planning,” he says. “We have a value acceleration process addressing eight key areas of the business that buyers look for and help them build a less owner-dependent business. As a result, we’ve collaborated with many owners who were ready to hang it up in three to five years and who found a new love for the business because, instead of working in the business, they’re now working on the business.”
He says it’s also important to put into place a key management team. “I was with a client the other day, and he had sent out an email to 70 people in his company that told them if they had a question, to come and see him— to 70 people. That’s a lot of owner involvement!”
He recommends that business owners ask themselves: Do you have your key management team in place? He says owners who are working in the business instead of on the business have too many direct reports, a common mistake.
“We call it the owner’s trap, where the owner knows all the customers and is the rainmaker for the business and manages the operations and is out front at the register and walking the grounds constantly. We’re not saying customer service and taking care of your customers is a bad thing — not at all, and it leads to more sales — but that’s your people’s job. Your goal is to train and mentor your people so that they can take care of the customer for you.”
Evaluating the Business
When working with a business looking to transition, Cimaglio says they start with a discovery period, during which they evaluate the business and assess what they call the three legs of the stool: 1) the personal side of the business, 2) financial readiness and 3) attractiveness of the business.
“The discovery stage is literally just us asking questions because we wouldn’t be doing our job if we just started throwing out solutions without knowing every aspect of the personal side, the business side, the financial side.” Discovery also includes a business valuation.
He says many of the questions they may not have considered, “but it really gets the process going. I’ll talk with a son or a daughter in the business who says, ‘Gosh, we’ve never really even talked about it.’ Keeping those discussion points open and keeping everyone engaged is extremely important in the process.
“Of course, especially during the discovery stage, you don’t want people running for the exit when they hear the owner is going to sell their business.” He says they meet with the owners to do business planning and work to eventually get to a stage where they have a plan in place for the employees— and that’s when the succession or exit announcement is made. “The announcement always goes much better when you take them into consideration, because your key people will be critical to a successful transition” he says.
A Team Sport
Cimaglio says exit planning is a team sport, with an accountant, lawyer, financial planner, and other trusted advisors of the owner involved in the process. “We quarterback that team and try to home in on the owner’s goals and get everybody working together to achieve the goals together. We are not lawyers and accountants, but we know enough to help in the process and get everyone working together.”
Your employees are also part of that team, he says, and they need to be involved in the process. The last thing a buyer wants to have happen is to lose the employees that made the business successful and keep it running.
“One of the attractive features of the company is your people and your human capital,” he says, so companies looking to sell need to let employees know that you not only want them to stay, but also that they are valued. He suggests offering key management a retention bonus; a phantom stock program, where they would get a percentage of the proceeds without having any ownership of the company; or other incentives to keep people happy to see a future with the company.
“Many people are living day by day, but many — especially on key management teams — are looking toward the future,” Cimaglio says. When the company owner gets close to the typical retirement age, “that gets people thinking. So you want to have plans in place to deal with that and a plan to make the announcement. We find that, if the employees see a future, and they can reap some rewards from that future, they’re much more engaged and will stay because they’re concerned about their career as well.”
He says sometimes the owner stays as part of the deal as well, “staying around for a year or two as part of an earn-out type scenario, or if the buyer or a replacement for the owner the buyer brings in wants to learn more from the owner or have the owner somewhat involved.
“A lot of times, what we see is people living in denial to a large degree. 100% of all business owners will have to sell their business someday — that’s just a fact, and it’s not on our timetable, unfortunately.”
He says owners need to also consider how the business would continue to operate if something happened to them — business continuity planning in both in the short-term (Where are the passwords? How will people continue to be paid?) and the longer-term considerations, which are “kind of like a will, but for your business,” he says. “Much of this is about preparation, and this is why we like to get in front of it with planning. The more planning you do, the more positive the outcome will be. At least that’s been our experience, and we’ve seen that with a lot of the clients we work with.
“Basically, successful outcomes come from good planning,” Cimaglio says. “We’ve worked with a variety of clients over the years, and the ones that waited too long when they were in their mid to late 70s … they were woefully unprepared compared to those who started early.”
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