Two supply house owners are in a similar situation but end up with different outcomes. Vastly different outcomes. Both are in their mid-60s and have been in the business since they were kids. Both have children who decided not to join the family business. 

Owner 1 decided to begin planning for his eventual exit in his early 60s. He had a conversation with his spouse, kids and  his accountant, whom he’d been with for years. He thought about what he wanted to do when (and if) he retired and made a plan aligned with his goals. For the next several years, he worked on that plan. 

Ultimately, he sold the business and stayed on during the transition period. Then he went on the road trip he’d always wanted to take with his wife, but had never found time for while running the business. 

On the other hand, Owner 2 had no plan. He wanted to keep working “as long as possible” because working in the business gave him a sense of fulfillment. Work gave him purpose, and he really enjoyed it. Plus, he couldn’t imagine anyone running the business better than him — after all, he was the glue who made the business what it is today. So he postponed talking about or thinking about a transition plan. 

Unfortunately, one day, a health scare forced the conversation, and he had to make some decisions quickly. Too quickly. He ended up selling the business as well. No plan, no transition. 

Which owner do you think walked away with more money for his business? Which business do you think is still flourishing today, and which one is floundering?

Ultimately, you either leave your business on your terms, or someone else’s. As Sinatra said, the goal is to end up saying “I did it my way,” not “I was forced to do something I didn’t want to do on someone else’s timeline.”

These conversations around succession, about retirement, about family dynamics, mortality and legacy are tough to have. However, they are so incredibly important — not only for you, but especially for your loved ones. Avoiding these tough topics doesn’t make them go away. Those owners who achieve the best outcomes for themselves, their families, their employees and their customers have the uncomfortable conversations sooner rather than later.

As you are having these conversations (well before you are ready to leave the business!), there are three realistic paths you can choose from, and each comes with its own set of questions and required planning.

Path 1: Family succession

This often seems like a dream situation for owners. Your children (and/or in-laws) are either in the business today or have expressed sincere interest in coming into the business. However, just because it seems like a dream situation doesn’t necessarily mean it’s an easy road for anyone. 

Like any path, many questions come with it. Are your kids capable of running the business today? If not, what training or development do they need? Do they actually want the responsibility or just the income? How do you think about/treat in-business and out-of-business family members fairly? What’s the impact of this transition on other key employees? How do you get your own value out, while setting them up for success? How do you empower/support them along the way to make more decisions when you are the one with considerably more experience? What key relationships do you need to transition to them, and how do you manage that? 

The list goes on and on. Putting a plan together and then thoughtfully executing it frequently takes years, not months.

Path 2: Management buyout

I hear this often from owners who don’t have children in the business — they’d prefer to reward the key people who helped them build it by transitioning it to their employees over time. This can be done either through an ESOP (Employee Stock Ownership Plan) or by selling directly to members of the management team. Neither path is quick and easy. 

Think of an ESOP as selling the business to your employees through a retirement plan. A trust buys your shares, usually over time, typically with borrowed money. Employees earn shares as part of their retirement benefits. Because ESOPs are retirement plans, there are many rules associated with them. 

A management buyout depends on your team having or getting access to capital and being credible borrowers. Capital could come from a Small Business Administration loan, seller financing or even private equity backers. Questions to think about here include: Is your team credible enough to be successful borrowers? Are you comfortable with the increased complexity of an ESOP structure?

Path 3: Outside sale (strategic buyer or private equity)

This path typically yields the highest valuation for the business, but it’s not for everyone. A strategic buyer typically means another company in the same industry. It could be interested in your business because you have a good team, a location it wants, a set of products that complements its own, or it may be looking to take out a key competitor. Having discussions with someone in the industry is a little risky — your employees, customers or suppliers could find out that you are thinking of selling the business, which could create turmoil for you. 

Private equity (PE) companies have been active in the distribution world over the past several years. They typically buy a company (called a “platform”), partner with the management team, and give them equity in the business (often in the form of stock options). If you sell to a PE company, it will frequently ask (compel) you to “rollover” a percentage of what you make on the sale to ensure you still have a personal stake in the company’s success during its “hold period,” which is approximately four to six years. 

Some owners make more from their rollover equity than they do when they initially sell.

Why waiting is the riskiest path

The real mistake I see too many owners make isn’t picking the wrong path; it’s not picking any path until they’re out of time. Waiting will destroy the one lever that actually improves outcomes — time. Time to build a bench, and transition some of your responsibilities. Time to clean up your financials. Time to take a look at your customer base and make sure you don’t have too many eggs in any one customer’s basket (buyers call this “customer concentration”). Owners who do best prepare for years and then run a real process that involves speaking with several potential buyers.

Face it - the sellers who do best plan for three to five years before they actually have to act.

I leave you with a few key questions to think about:

What do you want your life to look like in five years, and what’s the relationship you want to have with your business then?

If you were to win the lottery today and ride off into the sunset on your Harley tomorrow, could your business run without you?

How much of your business relies on the relationships that you have with your customers? With your suppliers?

How much is your business even worth?

My next column will tackle this last question. 

Greg Leidner is the founder of Lighthouse Point Advisors, a boutique advisory firm specializing in strategic planning, owner transitions and private equity partnerships for distribution businesses. He spent two decades in the industry as the former CEO of United Pipe & Steel Corp., where he led the business through transitions from family ownership to private equity to public company. Greg can be reached at [email protected], 617-821-1399 or at lighthousepointadv.com.