When Rick Hjelm's father passed away a few years ago, the family was left with a mess. Without a will or financial plan in place, the Hjelm family was forced to hire an attorney to sort through taxes, finances, assets, and more. “I didn't want to do that to my wife,” says Hjelm, owner of Phase II General Contractors, in Lakewood, Wash.
So Hjelm went to work, creating an elaborate but clear succession plan, just in case something ever happened to him. He purchased two life insurance policies, naming his brother, Ron, who is the company's project manager, as the beneficiary for both. Using the life insurance, Ron would purchase the company and building from Hjelm's wife. “I didn't want to put my brother or the company in debt during the transition, and I wanted my wife to be able to walk away and be set for life,” Hjelm says of the multipronged plan. Helping his brother and wife wasn't Hjelm's only motivation. He also wanted the company to survive. “I wanted this business to [keep] operating,” he says. “It has a great reputation, and I wanted it to continue on almost without skipping a beat.”
Succession planning, a rarity in the industry just a decade or two ago, has become a serious priority for many remodelers — big and small. Some, like Hjelm, take on the challenge to ensure that their family members — within and outside of the company — will be taken care of. Others may have their eyes set on retirement, ready to cash in on their years of hard work. Many family-run businesses hope to establish a legacy. “Succession plans are an excellent way to plan a controlled transfer of a business,” says Joel Weinstein, a partner at Los Angeles law firm Rutter Hobbs & Davidoff.
FOR SALE Jim Fisher always knew he wanted to build the kind of company that could one day be sold for a profit. After 23 years in the Sears Roebuck & Co. management program, Fisher struck out on his own in 1987, building a large and profitable remodeling business near Napa Valley, Calif. For more than a decade, Fisher grew the business, J. Fisher Construction, collecting accolades along the way, including REMODELING's Big50 award in 1996. “After I'd been in business for a couple of years, I would look around at the guys [having] garage sales, [selling] their tools,” who had just walked away, he says. “I thought, ‘Why do that?' Why not put in some systems that would be recognizable on a sale and be of value?”
Fisher's reputation and the company's accolades attracted more than just customers. They also drew the man who would eventually purchase the company. Pete Valentino, a contractor in San Diego, asked Fisher if he could work for him. In 1997, Valentino came on board. Then, in 2000, Fisher and Valentino entered into a five-year buy-sell agreement.
During the first year, Fisher began teaching Valentino the business. As time passed, Valentino's responsibilities grew. Then, in September 2005, the master and apprentice finalized the sale.
As the buy-sell process unfolded, Fisher kept a journal. Then, shortly after the sale, he found himself cooped up in a hospital room, recovering from colon cancer. While recuperating, Fisher turned his experience selling his business into a self-published book, Cash Out, Don't Walk Out, a how-to guide for remodelers.
Step one: Have a plan.
SYSTEMS AND PROCEDURES Regardless of whether you're selling a local beauty shop or a multibillion-dollar franchise, to be attractive to a buyer, a business must look like it runs effortlessly — from first-class employees and superior equipment to a solid reputation and sustained profits.
“Most people don't want to buy a job,” says Craig Deimler, who began working for his dad's company, Deimler & Sons Construction, in Harrisburg, Pa., when he was barely a teen, pushing a broom around the shop. Now he's the vice president and is poised to lead the company upon his father's retirement. “If I'm buying stock in a company, I don't want to buy a job there; I want to buy a return,” he says. “So I'm setting our company up so that whoever ends up [owning] the company — whether it be an employee or one or all of my children — [can have] the company run without them, and they will still get a return on that asset.”
To make his business attractive to a buyer, Fisher set up benchmarks, including the industry dream of 10-10-10: 10% net profit sustained over a period of five years; 10% owner compensation; and an operating reserve of 10% of gross sales. “If I could build systems that would generate those three results, it would be a very viable company to sell,” he says.
Then Deimler determined how to do it. “I stewed around with that for some time,” he admits. “What I did was place myself outside of my company looking in, and I established these three criteria. The next thing I did was to ask: What do I need to reach them?”
First, know the numbers. Fisher worked with an accountant hatching a plan to create the 10-10-10 goal. Then he needed a way to track it, so he created layered systems for every function in the company. “For example, what happens when a sales call comes in?” Fisher says. “I needed a paper trail, sales procedures step-by-step. After that I started layering in systems for production.”
FIND A BUYER When Paul and Nina Winans decided to sell their remodeling company, Winans Construction, in Oakland, Calif., the couple formulated a 10-year plan. “What we needed to accomplish in 10 years, between 1998 and 2008, was to work on wealth-building and general strategies where we'd have the flexibility to not run the company,” says Paul Winans, who sold the business in 2007, just a year shy of the company's 30th anniversary.
Once the couple was ready to sell, they consulted with other remodelers who had sold their companies. Then the Winanses posted information about the business on a handful of Web sites.
Although they had some interest in it, the Winanses decided that they didn't want to tackle the mounds of paperwork and legal jargon involved, so they hired a broker. The broker worked with the couple to put together a prospectus, which included information about the value of the company. Then they started advertising the company on the Web.