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Two Keys to Your Succession Plan

Two Keys to Your Succession Plan

April 2, 2018

Most owners of distribution companies invest their lives into building and running their businesses. But what happens when you retire or can’t run it any longer? We all expect to retire to spend more time with grandchildren, play golf or just do what we enjoy other than coming to the office every day. We all like to believe that we will live long into retirement, but accidents, illness and disabilities happen. Who would run your company if you couldn’t? It would be a tragedy to have your hard work slip away when a little planning could ensure your business’ successful legacy.

Whatever the reason for transitioning the leadership of your business, having a succession plan in place will make it quicker and smoother. A solid succession plan will also provide an increased return for the seller.

The time to think about selling your business is now. Planning should begin years before you actually think you will sell so you can prepare and make adjustments while you still have time. Whether the business is sold to family, employees, a private equity firm or a national distributor, counting on a substantial selling price based on the nice lifestyle the business has provided for you isn’t realistic. 

Let’s take a look at two key factors that should be part of every business succession plan.

Who will run your business next?

In part, because of a fast-growing number of Baby Boomers reaching retirement age, we are seeing an increased pace of consolidation in our industry. The first step in succession planning is identifying potential buyers. Consider family members, employees or business acquaintances who may be interested in the business and have the potential to continue what you have built. If you have a good candidate, start preparing them to make that transition based on your expected timeline. Review your local and national competition as potential candidates. Remember that you are building a succession plan at this time, not selling the business, so by reviewing your options you can make your business more attractive to potential buyers.

As part of this, assemble a good leadership team and create a succession plan for management. For example, you may have a good employee who would make a great general manager. An internal succession plan would include who on your bench would fill their existing role and how you would find a replacement for the promoted person’s position.

Consider if you would like to remain in the business after the sale and leverage professional help when available such as an advisory board or networking group.

Understand how your business will be valued – and how you can affect that value

For most owners of distribution companies, the business has provided them with a great lifestyle for many years. While it could provide the same for the next owner, the value of the business has more to do with net profit than that good feeling. Today the sale price of most businesses is a multiplier of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). I refer to it as net profit, but it is a standard accounting view that standardizes how to quantify a business’ earnings. The acquiring party and the lending institution will use this formula to place an industry-specific multiplier to EBITDA. A prospect that likes your business may pay a slightly higher multiplier than industry average based on efficiencies or synergies in the business, but there are limits. More than once I have witnessed an owner thinking their business was worth far more than their suitors did.

Ultimately the price needs to be fair for both sides. To receive a multiplier of EBITDA greater than what is normally paid the potential buyer will need to see stability and extra value in your business.  You can create that by investing in people, tools and processes that ensure a sustainable future beyond the sale of the business. A solid management team, updated technology, ERP system and documented processes will provide the buyer confidence that the business can continue running smoothly after the sale. Without these, the buyer and their bank will see something that requires additional investment and the purchase price will reflect that.

One of the quickest ways to add value to your business is by adding profitability. Consider pricing strategies and rebate programs to help drive up EBITDA. To get top dollar, you need to run it as if it will outlive you and begin making adjustments now so the business could run without you.

Plan for succession sooner rather than later. Build a solid plan to increase the stability and value of the business. Leverage professional help in areas you aren’t an expert in and then sleep well knowing you have an exit plan.

Paul Byrnes has been in the industrial distribution industry for more than 20 years. He is the vice president of distributor development for NetPlus Alliance, a buying group for industrial and contractor supplies distributors. Contact Paul at paul.byrnes@netplusalliance.com or visit netplusalliance.com.

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