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by RON STURGEON, AutoSalvageConsultant.com

The first article in this series listed more than 25 tactics to increase your business success. I have used all of them.

Well over half of my consulting assignments end up being about succession. It’s always the same story, the business isn’t doing as well as it used to. The leaders – many times dads – are getting older and haven’t changed enough, and are waiting for things in the industry and marketplace to return to the way that “they used to be”.

Business owners almost never sell at the top. Ego prevents them from doing so. From the top, the businesses have only one way to go: down. Decline usually happens slowly at first. Eventually it reaches a critical point where the business won’t support the lifestyle of the owner or even pay the bills. Those who consider selling usually have unrealistic expectations about what the business is worth. They always think it’s worth more than it is. That’s human nature. The owners wait too long to sell partly because they never created a smart succession plan.

If you own a business, when should you start talking about succession? You should at least talk about it 10 years before you expect to turn the business over to your successor. If you are about 50 years old, now is a good time to have a conversation about what will happen to your business after you exit.

Usually when I get a call for consulting about succession, this is how it goes: The business is headed downward and the owners have figured out that they don’t have a succession plan. If there are kids, the parents are convinced their kids aren’t ready to run the business.

That’s why I recommend having a talk about succession long before you think you need to. With a decade to the time of succession, you can do quite a bit to create a mentoring plan to ensure that, if the kids are keeping the business, they will be prepared to run it successfully.

Of course, successors are going to make mistakes, just as you did when you started the business. In some ways, they can make mistakes that you couldn’t because a mature business insulates them more from failure than you were insulated when you started from scratch.

If you are an owner, trying to value your yard, I offer one caution in assigning value to inventory. Just because your warehouse is full does not mean that everything you have really adds value to the business. A lot of what is in the warehouse is there because you have not been able to sell it, because no one wants it.

When I was growing, I bought a few salvage yards. Almost the first thing we did was to back a dump truck up to the roll up door and start throwing away what our systems showed us would not sell quickly enough or for enough to be worth holding. Sellers were always shocked at what we disposed of, but we needed the space for inventory we could turn profitably.

Here’s some good news: Your relatives can likely pay you a little more than market price for your business. The premium they can pay is partly because you will have to offer seller financing. They are paying extra to get reasonable terms. No one else is going to finance the sale of your yard to your sons or daughters.

So, what does a perfect succession look like for a current owner? Write a succession plan at 50. Prepare the next generation for a decade. Sell it when you are 60. Get a 20 year note that provides income and a comfortable standard of living for you in retirement and that offers your children an opportunity to carry on your legacy through the business that you started.

Another way that can work well is selling the business first, on a shorter note, and renting your successors the land with an option to buy the real estate later, with little or no down payment and financing over a longer term.

You may want to add a modest salary for staying around and doing whatever needs to be done (taking bank deposits, helping with banking and community relations, etc.) during times when you are not out travelling and enjoying life.

Perfect or not, make a succession plan. I admit that it’s hard to talk about the future of a business that you founded. I try to make it easier. Usually, I talk to potential buyers and sellers separately, then together, and reach agreement or lay the groundwork. Having a facilitator can be helpful because he or she is not emotionally involved. Often, owners thinking about succession planning make the wise choice to work with an attorney, an accountant, or an industry expert.

No matter where you are on the journey in succession planning, it is also wise to have more than one source of income. Don’t rely solely on your business. Before you get to 60, make sure you are investing some of your profits in rental property or other assets that will produce income for you after you sell the business. Put your eggs in a few baskets. That will also make it a little easier to pass the business on, when the right time comes.

Published in the May 2017 Edition of American Recycler News