By Scot Hunsaker
Before employees bought Counsilman-Hunsaker (this author’s former business) in 2012, the firm was in the same difficult place many long-time pool and hot tub business owners find themselves today. Like Counsilman-Hunsaker, a large number of companies in this industry were founded in the ’60s and ’70s by individuals with strong personalities, who spent many years working in the business—not on the business. These companies often involve family members or employees who are like family.
As patriarchs of these family firms consider retirement, one of the many questions they ask themselves is, “How can the company’s legacy be maintained while at the same time taking care
of employees and customers?” This is an even more pressing question when it comes to small family businesses.
Consider the following statistics from the Family Business Institute:
- 88 per cent of family business owners believe the same family or families will control their company in five years;
- 70 per cent of family-owned business fail or are sold before the second generation gets a chance to take over;
- 12 per cent remain active, privately held companies for the third generation to lead; and
- three per cent operate into the fourth generation or beyond.
The prospects of a successful transition are just as poor when trying to sell to a third party. Why? The institute shows:
- 75 per cent of closely held business owners have no formal plan to sell, transfer, or hand down their business; and
- only 16 per cent of owners are seeking input from their successors in their development plans.
As a result, owners are rarely prepared to successfully transition their business—and realize its full value.
Continuing the legacy of a service-oriented business
In a ’50s management style, where all decisions were made at the top and products were manufactured by a machine, selling a company was often a formula. This legacy remains with book value, earnings before interest, taxes, and amortization (EBITA), and revenue formulas for company worth.
But for service-oriented businesses, it is harder to successfully transfer to a third party and more difficult to accurately value than a machine making a product.
As a result, today’s company owners may need to create their future owners. This process requires going beyond the transactional business preparation with legal and accounting and, instead, teaching and mentoring the team to successfully lead the organization going forward.
That said, how can a lifetime of intuitional knowledge and business savvy be transferred to the next generation? Fortunately, there is an answer to this question that protects a company’s legacy, grows its liquidity, and makes employees (especially tough to please millennials) more loyal.
In general terms, this method involves turning employees into owners. This process goes beyond the employee stock ownership plan (ESOP) financing model, which often does not allow employees to make informed decisions and may rely too heavily on third-party appraisers and trustees.