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Passing the Torch

Richard Huntley, president of WeKanDo Construction Inc. in San Juan, Puerto Rico, has begun thinking about the knotty process of picking a successor. The question is, who?

A few employees have been with him for years. His sister works in human resources and accounts payable, but is new to the company. As for other potential heirs, well, one of Huntley’s two children is two years old, the other is a newborn. It seems that a business transfer will take time to develop and unfold.

“It would be good to know the steps,” says Huntley. “How are we supposed to cut the shares?”

Welcome to succession planning, where business owners must train new leaders, tally the assets, plot the process to provide for their retirement and, oh yes, unify and clarify the roles of all in the family. Just how is a business owner supposed to do that?

“You Have One

Times are tough for mergers and acquisitions. With a recession in full gear, professionals who help business owners prepare businesses for sale say it’s a buyer’s market.

“We have some 77 million Baby Boomers, and more than 4 million own businesses,” says Dan Shea, CEPA, president of Pacific West Exit Planners, Irvine, Calif. “They’re going to want to sell, but there’s a lull in the market—not enough buyers and not enough qualified successors to run those companies.”

Entrepreneurs know how to start and grow businesses, but exit planning is never easy. Few know where to begin, and they frequently delay making necessary succession plans. “They tend to wait until it’s too late, which jeopardizes the sale,” Shea says. “You have one shot to get it right.”

Shea once met with two owners of a successful construction company. They had been in business together for years and were ready to sell. No children were old enough to assume the role of president, so they hoped to transfer their company to a third party. But despite owning a profitable enterprise, third-party prospects kept turning down their offers. No one viewed the business as desirable because the owners were unwilling to stay on board after the sale.

Transferring ownership to key employees was also out of the question. Nobody had been groomed to take on the responsibility, and funding for such a buyout was unavailable.

Hence, the only option was to liquidate the operation. Therein was the problem. Liquidation netted little beyond the value of the tangible assets. While the owners pocketed some proceeds from the sale of the assets, Shea estimates they left anywhere from $10 million to $15 million of additional company value on the table. In the end, dozens of employees simply lost their jobs. The business disappeared.

Perhaps professionals, including business brokers, valuation specialists and exit planning consultants, could have helped. “Every dollar you spend on exit planning services brings at least a six-to-one return,” Shea says. “It could be as much as 100 to 1—$1,000 could be worth $100,000 on the back side.”

Hiring a Psychologist

Still, tales of successful succession planning abound in the wall and ceiling industry.

Mike Chambers, president of J&B Acoustical, Inc., Mansfield, Ohio, for example, says his company went through a successful succession when his father transferred the business a few years back. The transfer worked because the business was stable, Chambers says. Key employees and staff remained in their positions and rallied to support the new leaders.

“When they handed over the keys, the staff jumped at the chance to help us,” Chambers says. “My dad said, ‘Here’s your desk. You’re the president.’ It was really that simple.”

Today, J&B Acoustical is in the midst of Transition Number 2. This time, the process is more sophisticated. “We’ve got pros involved,” Chambers says. Chambers brought in a psychologist with expertise in family succession planning. Everyone in the office completed a lengthy questionnaire on each individual being considered for the presidency—two are Chambers’ sons, and one is his nephew.

“You’d think it would be easy, but it does get emotional,” Chambers says. “We’ve tried to keep it at arm’s length.”

According to the psychologist, having staff weigh in on choosing a successor helps to identify each candidates’ strengths and weaknesses. It brings to light which candidates, if any, have curried the favor of the very employees they may soon lead. The surveys even reveal whether a candidate has the necessary skills, training and mindset to bear the weighty duties of running a company.

“We’ve seen people over the years promoted beyond their ability, and it’s devastating—not only for the company but psychologically for the individual,” Chambers says.

But, the recession has halted the process. The company has extended its succession planning and business transfer time frame.

“Quite honestly, given the economic times, we don’t feel comfortable handing off the keys,” Chambers says. “Most of us are fighting for survival, so why add the stress of making someone the new CEO right now? It’s tough enough for them to do their current jobs.”

“Mother Ship” Separation

Gregg Brady, president of Brady Company/Central California, Inc., Castroville, Calif., says his father, Ron Brady, divided the original E.F. Brady Company three ways: one Brady operation went to each of three sons. (One son has since left the contracting business, and the ownership at that operation now includes a key employee outside the Brady family.)

“I bought my operation on a graduated basis,” Brady says. “Every year, we were able to take more earned income and apply it toward the purchase, while we perpetuated the business.”

Today, Brady is the sole owner of Brady Company/Central California. He owes that to the foresight of his father, who worked with advisors and planned the business’s succession for decades. But existing staff and management also played an important role. Fundamentally, they supported the change.

“We had a 38-year-plus general manager who worked with me during the transition,” Brady says. “It’s key to have your support staff 100 percent behind your being at the helm. They have to believe in you.”

Brady feels he has the best of both worlds: size and independence. His operation, along with the operations in San Diego and Los Angeles, pools buying clout to line up banking, bonding, IT services and risk management. Thus, Brady benefits from a sort of strength in Brady family numbers. But, he also has autonomy. Being located in Northern California, he says his “geographic separation from the mother ship” helps keep his company decisions focused on local needs.

Looking forward, Brady hopes to provide his children with opportunities similar to what his father provide for him.

“I worked in our business during the summers,” Brady says. “I went to college and got out with a degree in human resource management. That was in 1989, when we were cutting back. I went into the field and became a laborer apprentice. I learned to lath and frame. Then, I went into contract administration, then change orders, then estimating. Those exposures were critical.”

For now, Brady’s succession plans are general: keeping his company viable and keeping his children exposed to it. It will take time. The children are twins—a boy and a girl in the sixth grade.

“I have them involved with AWCI. They’ve gone to AWCI’s Convention. They’ve gone to the AWCI Industry Executives’ Conference & Committee Week. I talk about my work, and they ask about it—‘So, Dad, you like your job, right?’—I’m starting to hear interest from them, but I don’t want them to feel forced into it. That was not the way it was for me. In fact, my father once said to me, ‘I bought you books and sent you to school, and this is what you want to do?’ ‘Yes.’ ‘Are you sure?’ ‘Yes, I’m sure.’”

Mark L. Johnson is an industry writer and marketing communications consultant.

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