TOM SWARTZ: Chip, what is the process that determines your ownership role in the company and what steps were taken to become an owner?
CHIP CRAWFORD: It was a conscious decision in 1999 to work for the company with the intent of one day owning the company. I had to build my side of the business up and, basically, I had to earn it. We set some ground rules about what “earning it” meant and what it looked like very early on in the process. We established a process of how it was going to be done, the timeframe, the percentage of ownership, and what the criteria was for the transfer of the company to me from my parents.
SWARTZ: Doug, what process did you go through to transfer the business to your two sons?
DOUG SUTTON: My oldest son initially wanted to be an investment banker until he found out he didn’t like the business that much. Prior to that, he worked for the company through high school and college under the superintendent. He got an understanding of what went on in the business, which is very important from that standpoint. As he continued in the business, he took over part of my role, which was working with the men. The hardest thing for all of us was his transition into that role. One day, a carpenter said to me: “I am going out on this job, can you tell me anything about it?” I responded by saying: “Haven’t you reviewed this with Doug Jr.?” He responded: “Well yes, but you sold this job.” All of a sudden a light clicked on in my brain and I thought: “Wait a minute, I am undermining Doug Jr.’s authority.” From that point on, I no longer came into the office at 7 a.m., I started coming in at 8:30 a.m. after the men had been gone.
This month featuring:
Chip Crawford, Crawford Builders, Lexington, Ky.
Crawford Builders was started in 1971 by Chip’s father, Mac Crawford. The firm specializes in large-scale structural projects, additions, and whole-house remodeling projects. They have 15 employees with a revenue that ranges between $3-5 million per year.
Doug Sutton, Sr., Sutton Siding & Remodeling, Springfield, Ill.
Sutton Siding & Remodeling is a family owned business that initially started as an exterior remodeling company in 1946. Sutton began working at the company full-time in 1973 until he retired in 2012. The firm currently has 50 employees and their volume is $8 million per year.
SWARTZ: I’ve always said it’s the old guy getting in the way of a succession plan, not the young guy trying to take over. Process-wise, what did you do for your succession plan?
SUTTON: Doug Jr. continued to do his job and, four or five years later, my son Michael started learning the process of going to work for the superintendent same as Doug Jr. As a result, they were able to split the duties. Mike took over Doug’s job while Doug did more in the sales side. We’ve got a division of labor within the company that is very compatible and working together. I think that’s very important on a transfer as you start going through this process.
SWARTZ: For the succession process to work, have you entered into an agreement with the next-generation owners?
SUTTON: We did originally, but it was informal. My wife and I did do a non-gift transfer. That way, they had some ownership before they had complete ownership. I wanted to be able to give them part in the early portion of the process and later we gave them more. Then there was real estate involvement as well so you need some sort of written involvement because of the IRS. That’s very important for the reader to know—they need to go through the proper transfer process.
SWARTZ: Chip, did you ever get to a formal agreement with your father? Did you have a written agreement with him about how you were going to transition the business?
CRAWFORD: When I started with the company, there was a very clear job description of what my roles and duties were going to be in the company. Then, those roles and duties changed and progressed as I grew in the business. We set forth a formal plan as to how ownership or portions of ownership would transfer. That was done in a formal, written sense and we discussed how the business would need to change and be flexible based on the economy and the housing market. The agreement is very much a living document. We review it and it’s part of our annual business plan.
SWARTZ: That’s one thing that you can do as a father-son team, rather than one person from the outside buying the company who’s not related to the family. Would you agree with that statement?
CRAWFORD: Yes, if you have employees or other outside partnerships, you tend to actually be more formal with an outside party than you do with your family. That can be a problem. You should approach a partnership with your family just as formally as you would with someone from the outside. The discussions of compensation, ownership transfer, and rules and responsibilities should be just as formally put together with family members as you would if they were business partners or employees.
SWARTZ: How does the new generation arrive at a fair dollar amount that is representative of the portion of the company you will own?
CRAWFORD: We have very little assets in the business. All of our properties and personal holdings are not within that company. It is very much a cash- and performance-based company. All of the compensation among my father, a superintendent, and myself are performance based. As far as evaluating the company and the specific value of the company, it’s pretty simple because we have limited assets. We have an annual audit by our CPA that allows us to know exactly what the value is of the company. Basically, when my father felt like I got to a point where I was contributing a certain percentage of the value of the company, that portion of the company was then transferred to me.
SWARTZ: How did you arrive at a fair dollar amount the new generation was going to be pay for the company?
SUTTON: We did have some legal representation that was really looking at my sons as if they were small business owners. These attorneys helped us with the business non-tax transfer. The three us sat down together and we went over things. My only problem was: How do you value the company? We needed to figure out how to make this business continue to grow without making it a burden on the new owners. Over the years, the company has been very successful in terms of our relationships and income. As far as I was concerned, all I needed from the sale of the company was enough income to get by. We were able to structure the sale so the new owners didn’t have the burden of having to go to the bank, borrow money, paying the interest, etc. We worked the structure for this deal out internally through the attorneys and it worked out very well. It was simple and easy, but valuation is very difficult because most of the time the seller thinks the company is worth more than what it really is on the open market. We’ve seen owners think their company was worth a ton of money. They lose out because they don’t make it so that is structured properly for the new generation so they can continue the success for the family in the entirety. You have to be careful in how you value the company as far as the dollar situation. In our case, I wasn’t too worried about the number of dollars coming in. I just wanted to ensure it was easy to keep the company going and that it remained successful.
SWARTZ: Did you use a single lawyer or a team of lawyers for the transition process?
SUTTON: I think you have to look at the attorney and the relationship you have with the attorney. My sons had a relationship with one attorney they had a lot of confidence in and his expertise was small businesses and family owned companies. I did not have one for the transition process. Once all the paperwork was in, there were no problems; it was satisfactory after we made a couple minor changes. I would advise the readers to have the utmost confidence in the person they are dealing with as far as the attorney relationship is considered. The attorney represents who hired him—that’s his client. The purchaser may have a different relationship with that same attorney.
CRAWFORD: My father had our corporate accountant and company attorney draft the ownership agreement and do the evaluation, I did have someone else look over the documents. Again, it was pretty standard and I made one or two minor suggestions to the documents. I always think it’s good to get your own representation to look at the documents. The biggest thing is to try and separate the emotional aspect of having family involved and the father-son relationship versus a business transaction. We actually stepped away from the process at different times. I think the biggest thing about for us was not the emotional part, the percentage or anything else, but it was timing. Did it occur at a time that I thought was right? Did it occur at a time that my father thought was right?
SWARTZ: Was there ever a consideration for a contingency plan? By that I mean, if you have two people involved in the transaction, what if there is a problem or an accident? How does the former owner of the company still get paid during the transition period?
SUTTON: Yes, even in my beginning years when I had a business partnership with my parents and we bought out my brother. We went ahead and did a buy-sell agreement at that point. When I took it over later, we had an insurance policy in place for my two sons so the company could continue and they could be able to live comfortably by the sale of the stock back to the corporation.
CRAWFORD: The company has bought corporate life insurance policies for both my father and myself. If something catastrophic were to happen to my father, or me, the company has an umbrella policy that will compensate either of us. Also, I’ve been involved with his will as well.
SWARTZ: How did the existing employees react to the change in leadership and were there any changes done by the new generation of owners?
SUTTON: Not really. The employees accepted the decision very well and there were no real problems with employee relations. Quite honestly, the transition was very smooth. I still was going in to the office, I still have an office and desk there to do some other type of work, and I am there to assist them if they have problems.
CRAWFORD: We had some initial feedback from employees and we still do. Some employees have multiple bosses, and I think that’s normal within any company. It is my responsibility to be sensitive to the employee needs and earn their respect and trust. My father’s responsibility is to not undermine and trust me to make sound decisions. Anytime either of those two occurs is when you’ll have some issues. But these are the growing pains of any company in the transitional situation.
SWARTZ: Has there been any stressful moments that you can share during the negations or the transition process from father to son?
CRAWFORD: The only time was when there was not good communication between my father and me. From my perspective, I should have asked more questions earlier in the process so that I understood what he was thinking. He also could have conveyed his thoughts a little earlier. That’s why I keep stressing the open lines of communication. There are some amazing advantages to working with your family. I can’t imagine not working with my family. However, the stresses you have with every family occur exponentially in a business because you are with them everyday. It can all be solved with good, open communication.
SUTTON: I probably should have done the transition a few years earlier, and that’s some advice I would offer: Start the transition plan earlier. At one time we only had one son in the business, and we didn’t think our other son was going to get into the business, but he eventually did. It’s one of those things that we may have done differently.
SWARTZ: What advice would you give to remodelers who want to start on a succession plan?
CRAWFORD: Obviously, communicating your thoughts to each other is key. Finding out what the expectations are of each and being able to talk about that in an open setting. One of the things we did that helped the company as a whole was to have an annual planning session. Instead of just having the conversation about our businesses haphazardly, we annually take a day or two to talk about our goals and objectives for the company. Mostly, this discussion was between my father and myself. We had a formal agenda that we created and shared with each other prior to the meeting. Taking that dedicated time, sitting and talking every year to explore our goals and objectives set forth a path for us to be working toward for the year.
SUTTON: Number one, you really need make sure—because this is a very complex situation from a tax angle—that you have an adviser that is very familiar with small business and family corporations. Planning is the key process and Chip mentioned cooperation and working together, and I also think that is very important. Part of what I have picked up over the years is from my association with the Remodeler’s Council at NAHB and going through the educational process, business planning, sales and marketing, and everything else. It all comes together. We need to have the educational background to make sure our business is successful. But we also need succession planning education to make sure that financial adviser or legal adviser really does know what he is doing for small business. Good legal advice, sitting down and going over the expectations of where you want the business to go, and put time frames into the planning. PR