Lupberger: A Real-life Business Transition Case Study

An established company with 40 years in the industry needs a successor.

authors David Lupberger | November 30, 2020

We will all exit our businesses. It is inevitable. Since we all can accept that day will come, can we begin to plan with that end in mind?  Not today, and perhaps not even for another 15 years. With that said, can we proactively begin to think about this eventual transition/exit?

Rule No. 1: There Must Be A Plan

Do you do a remodeling project without a building plan and drawings?  No – no construction plans would lead to some extremely disappointed and angry clients. No – we need a plan. Yogi Berra, a baseball hall of famer, uttered the memorable quote below.

“You have got to be very careful if you don’t know where you are going, because you might not get there”

Let us begin to imagine your eventual exit. What must happen for you to leave when you want, for the money you want, with a company successor in place that has both your confidence and the experience to succeed? Like most building plans, your own plan will be subject to change. Let us begin to imagine that plan so that you do not leave your family, company, and past clients unprepared for that potential departure!

An Actual Case Study

Here is an overview of a company I am working with now:

  • Established company
    • 40 years in the industry
    • Established relationships with:
      • Past clients
      • Supplier relationships
      • Trade contractor relationships
    • Written position descriptions
    • Documented accounting controls
    • The owner working less that 20-hours a week

With the company above, the owner had a successor chosen but before the transition took place, the potential successor let him know that he did not want the responsibility of managing this company. He had seen the challenges of ownership and decided that he did not want that for his own life. The good news was that the owner learned this before the transition took place. The bad news was that there was now no successor in place.

In speaking with the owner, we evaluated a potential sale to a qualified third party but there were issues.

  • Custom construction/remodeling companies are not in high demand.
  • Due to market conditions, potential company sale prices are diminished.
    • Every year building contractors start over. (Doing $3 million in business one year does not guarantee that you will do another $3 million in business the next year.)
    • Remodeling is subject to the whims of the economy, example, COVID-19.

There was also another issue we saw with a potential sale—maintaining the strong and positive company culture. As many employees had been with the company for several years, the owner wanted to maintain that strong company culture. Selling to a third party could endanger that strong company culture and the owner felt very strongly about maintaining the non-monetary goals below:

  • Maintaining a strong company culture,
  • Taking the business to the next level,
  • Acknowledging key employees,
  • Community involvement,
  • and owner legacy.

Due to these desired outcomes, we have adopted the following plan. As the owner plans to work for another three to five years, we are going to find and “grow” the next company CEO and owner.

  • Recruit a new general manager.
  • Implement executive assessment testing to evaluate potential candidate aptitudes and attitudes, strengths and weaknesses.
  • Document a three- to five-year transition plan where the new general manager/CEO will assume all day-to-day responsibilities in a systematic transition plan over time.
  • Implement a deferred compensation plan where the new GM is awarded company stock on an annual basis.
  • Stock will be given to the new GM as a company earn-out based on specific performance metrics regarding company growth and profitability.
  • Additional stock will be awarded to key employees as a stay bonus or a retention bonus to keep them invested in the continued company health and growth.
  • All company stock is vested. If the GM or key employees leave before the vesting period is completed, they lose that compensation bonus.

This highly customized transition plan will provide this exiting owner with the following benefits.

  • He gets to find and grow the new GM/future company owner.
  • Aspirational, non-monetary company goals are maintained.
  • There is a gradual handoff/transition to the new GM/owner.
  • The strong company culture is maintained:
    • With employees,
    • With past customers,
    • With key suppliers,
    • With key trade contractors.
  • Compensation bonuses are based on company performance—employees are encouraged to help grow company revenue/profitability.
  • The owner legacy is maintained through an orderly and planned transition.

Due to this strong company culture and history, the new, incoming owner benefits from 40 years of history. The potential new owner benefits from the following:

  • A company with an exceptional reputation
  • Established trade-contractor and supplier relationships
  • A group of employees who understand, maintain, and are committed to a strong company reputation
  • Established company value-drivers:
    • Stable company cash flow,
    • Effective financial controls,
    • A solid, diversified customer base,
    • A stable and motivated management team,
    • Business systems that can improve the sustainability of cash flows,
    • A business facility with a physical appearance supporting the quality of work that they do.

When the goals above of this well-designed transition plan are achieved, we have the basis for a win-win transaction. Everyone benefits—the buyer, seller, employees, and past clients. I will always strive for a win-win transaction because if the transaction does not benefit both buyer and seller, it will probably fail. Both parties must see and be committed to the end goal. A win-win agreement can guarantee a positive company transfer and sale.

As you can see above, there are numerous moving parts to this eventual transfer. Simply, every company is unique, and every exit plan must address these unique company characteristics. There is no one-size-fits-all any more than there is a standard remodeling design or plan. This is a highly personalized design process.

Start now. Begin to think about a company where you are not required to oversee day-to-day operations. That is at the heart of a good transition goal. If I can assist you with an initial company exit assessment, please let me know. You can contact me at QR

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