Before employees bought Counsilman-Hunsaker (this author’s former business), 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 percent of family business owners believe the same family or families will control their company in five years;
- 70 percent of family-owned business fail or are sold before the second generation gets a chance to take over;
- 12 percent remain active, privately held companies for the third generation to lead; and
- three percent 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 percent of closely held business owners have no formal plan to sell, transfer, or hand down their business; and
- only 16 percent 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.
Turning employees into owners actually gives them the skills and information they need to think and act like entrepreneurs. These same entrepreneurs end up being the best people to take over the company when the owner is ready to retire. Harnessing the collective energy of all employees does not happen overnight, however. Creating an employee succession plan can take three to five years to develop, depending on the business owner’s priorities and the guidance he/she receives.
Many owners make the mistake of underestimating how much time this transition takes. Too often, they do not put any effort into a succession plan until it is too late. Timeframe aside, turning employees into owners comes down to a shift in mindset that the value of the company is not in what it produces, but rather in its employees and the amazing things they can accomplish through collaboration. The following three-part strategy can help make this transition:
- Start having authentic conversations
This first step is often the hardest for owners accustomed to running the business. Owners
can start by having authentic conversations with employees about how they make knowledgeable decisions. This includes:
- What information do they watch?
- What is good?
- What keeps them up at night?
- How is information acquired and when is it time to act on it?
Some exercises that work to accomplish this task include:
- Corporate dashboard: This is a simple look at how the company is doing, without needing a master’s in business administration. It puts financial metrics in a form so everyone can understand and use.
- SWOT (strengths, weaknesses, opportunities, threats): The attitude, “When I want your opinion, I’ll ask for it,” will not build a team for the future. Having authentic conversations about the company’s strengths, weaknesses, opportunities, and threats allows current and future leaders to create a common vocabulary about the critical issues facing the business.
- Employee surveys: Business owners should ask their employees what matters to them or what concerns they may have. It is also good to know what is working and not working for them with respect to the company. Knowing these answers can reveal a lot about a company, as well as provide the opportunity for improvement.
- Listen to customers: Like the company’s employees, customers are a valuable resource and should be included in the transition process. This eliminates decisions based on the “I think” model to “I know” by focusing on true customer data.
Now it is time to start the strategic planning process. This is often done through a workshop away from the office. It is important to select candidates for this process on their willingness and ability to lead, not titles.
After selecting the team, start having authentic conversations and prioritize what matters most for the future of the company. Remember to let the employees lead these conversations. Owners at this point should be more like mediators and wise counselors. This will be especially appealing to younger employees, or so-called millennials—and create new loyalty.
This stage is also an opportunity for the owner to test the candidates. Who has the will and the ability to lead and get things done?
- Empower employees with institutional knowledge and tools
During this phase, owners transfer the institutional knowledge out of their heads into the organization for all to access. Sharing information openly is critically important because employees need to be involved and reassured that what they are doing really makes a difference for the company. Remember, knowledge is not power. Sharing knowledge is power. The following steps can help accomplish this task:
- Develop a master toolbox: It should contain the daily tools for completing tasks, as well as help the company communicate with a consistent, knowledgeable message. A good master toolbox should contain:
- Design details
- Engineering calculations
- Co-ordination documents
- Fee schedules
- Marketing materials
- Share and document institutional knowledge: Host ‘lunch and learns’ and ‘fun shops’ in which employees can obtain education and share business-related knowledge.
- Manage change: As more employees take functional ownership of the company, it is important to have a system that manages the constant change required to stay successful.
Start by developing a process that captures opportunities for improvement.
Over a 10-year period, the team at this author’s former company made more than 2500 refinements to the system, improving quality, performance, and efficiency. They also formally developed a corporate knowledge base comprising more than 240,000 documents that are searchable and editable so when questions arise, they can be accessed and consulted.
- Embrace the tools of leadership and trust with confidence
In this stage, owners really begin to see the transition process take hold as employees embrace the tools of leadership they have been given over the course of the first two steps. At this point, every employee should be working under the shared-fate philosophy, meaning all employees share in the company’s success. These tips will help in this process:
- All for one, one for all: Institutional knowledge and business savvy has been shared through authentic conversations and empowerment, but how does a business owner pass on to others the type of attention to detail that keeps them up at night? A shared-fate system that links financial reward and loss is one successful method. This involves creating a single financial metric that drives the organization as well as rewards the entire team.
- Use the tools: Use a common vocabulary for discussing the business that is based on shared facts. This is achieved through using the corporate dashboard, SWOT, and employee and customer surveys. Taken together, these tools make it possible to have knowledgeable discussions about the organization.
- Embrace a shared fate philosophy: The entire team can now access the corporate knowledge base and change systems and process to positively impact operations using the strategic planning and system improvement. The team can collectively share the successes and failures of the organization through shared fate. The foundation has been developed to discuss
- Define ownership: It is important to create a common understanding about what ownership means going forward. Some common questions to address include:
- What should be the criteria for an owner?
- Who should decide who gets to buy stock and when?
- Who should run the company when there is not a majority owner?
- Should owners personally guarantee debt when required?
- Who should not be allowed to buy stock?
- What decisions should the owner expect to make or be consulted?
Ultimately, these steps—and working with a knowledgeable partner—will help business owners turn the most difficult transition of their lives into a rewarding experience for employees, customers, and themselves.
This article was written by Scot Hunsaker and originally appeared on Pool & Spa Marketing [link].