Larry Chavez loves his work, which is running the home improvement business he’s built up over the course of a lifetime. Chavez owns and operates Renewal by Andersen of New Mexico and Arizona, RBA of Boise, a full-service remodeling company, and a hot tub company, all under an umbrella called Dreamstyle Remodeling. “I don’t think I’ll ever be totally gone,” says the 68-year-old owner. Instead, he says, “I will continue to put in my 60-to-65-hour week” while Dreamstyle moves toward reaching its 2017 sales target of $100 million. Then, Chavez says, maybe then, he may wind things down.
The old joke about owning a home improvement company is that it’s a hard way to make an easy living. A well-managed operation can make an owner wealthy, or at least well off. It also demands constant attention.
And if a home improvement company reaches any kind of size, sooner or later the owner has to think about how to cash out, so that he or she can retire. It’s not an easy thing to pull off, which is why most owners avoid thinking about it.
There are, experts say, five ways to leave a business. You can sell it to outside investors; sell it to existing management; sell it to employees via ESOP (employee stock ownership plan); sell it to a son, daughter, or other relative; or you can gift it to a relative via incremental transfers of stock, stretched across decades. Another way—which is, in fact, a common one among business owners generally—is to die without making a decision.
Kevin Kennedy, a one-time roofing company co-owner who is now a full-time expert on exit strategy and succession planning, says that in the construction industry the most common methods of ownership transfer are sale to outside investors or gifting to business-active offspring. His company, Beacon Exit Planning & Succession, advises owners on how to put together a succession plan, that is, a strategy whereby the owner replaces himself. Kennedy points out that only about one in five companies put up for sale are actually purchased by outside investors—one in 10 in construction, due to the cyclical nature of the industry. His strong suggestion is that owners formulate an exit strategy first—that is, decide when they’re going to leave—and then work backward from that point to put together the succession plan.
“The owner,” Kennedy says, “can’t begin to commit until he can clearly see his financial future, after taxes. Then he can pick a date at which he can begin cutting back. And he’ll want to control the business in the process.”
Kennedy says that selecting a date for departure is so critical that he won’t even work with a company unless the owner agrees up front to do that.
Many Paths to the Exit
For most owners, the business is far and away their largest financial asset. Without a plan to replace themselves, that asset remains locked up and unavailable, their wealth “trapped inside the business,” in Kennedy’s description. He suggests that company owners not only put together a plan but also regularly revisit it, making adjustments as the business changes.
That plan, he says, will have many moving parts and, he suggests, will take at least three months to assemble. There’s the attorney part, the financial planner part, the CPA part, the tax consultant part—since tax implications “range from 0 percent to 55 percent and each path has a different value and different complications and compromises to meet the owner’s goal.”
Back in 2007, after two-and-a-half years of research, Bob Dillon, owner of Unique Home Solutions, in Indianapolis, had an outside appraisal company come in and put a value on his company, then restructured Unique as an ESOP. His goal was greater productivity, and continuity. He wanted the company’s current business practices, employee careers, and customer warranty/service commitments to go on long after he was out of the company picture. Today Dillon advises other owners to “carefully investigate” exit options and how those are structured, and not to overestimate the benefits you’re going to get from a sale.
The complexity of the process, and the owner-centric nature of small construction companies, is why so many put it off. Fewer than 30 percent of businesses have a succession plan. Tom Deans, a speaker on succession and the author of The New York Times’ recommended book, Every Family’s Business, points out that when owners of small businesses die without a valid will, state intestacy laws determine the distribution of assets. His suggestion is that owners looking to transfer their business to the next generation sell rather than gift the business, so that, among other things, the new owner is free to make necessary changes. But whether they sell it or gift it to the next generation, Deans says, current owners will need to prepare that next generation to manage and own the business, if they want it to continue. Essential, he says, are “open, honest conversations about who owns how much of that business.”
Management Team in Place
The circumstances of every business differ, and so will exit plans. The important thing, experts say, is to have one, share it, and act on it. Fifteen years ago, Jim Lett, the now 60-something owner of ABE Doors & Windows, in Allentown, Pa., sat down with his attorney, his CPA, and a financial planner to craft his exit plan. Three years ago, he reevaluated it. Next month he’ll be looking at it again, this time with input from a consultant. Key to his plan, Lett says, was developing a management team of three people reporting directly to the owner. Meanwhile, Lett told his son, Jim Jr., who works at ABE Door, that he would be willing to make him the future owner if Jim Jr. took a masters degree in business. “When he got his masters, my wife and I decided it was time to transition the business over to him,” Lett says. That’s underway in a 20-year time frame that has Jim Jr. becoming majority owner after 10 years.
For Chavez, too, “building a very strong management team” has given him the reassurance he needs to step back. But stepping away altogether is another thing. “I can’t imagine me retiring and not being connected to the company,” he says. “I enjoy the challenge and what we’ve accomplished and feel that there’s a whole lot more to be accomplished.” As for Lett, he now spends six months a year at his home in Florida, where technology enables him to work 20 hours a week, for instance, sitting in on hour-and-a-half company sales meetings via Skype. Those are hours he squeezes in between golf games.