The “Succession Planning” advanced education session at Winter Institute 13 in Memphis demonstrated to booksellers the importance of designing an exit plan for their business, whether they are preparing to retire or expect to own their store for many years to come.
The session, which was exclusively for store owners and managers, was moderated by ABA CFO Robyn DesHotel and featured Chuck Robinson, former owner with his wife Dee of Village Books and Paper Dreams and current head of Chuck Robinson Associates in Bellingham, Washington, and Mark A. Orndorff from Southard Financial LLC in Memphis, a local financial group that offers business valuations.
The Robinsons sold Village Books, which has locations in Bellingham and Lynden, Washington, on January 1, 2017, to three longtime employees, after over 36 years in business. One new owner, Sarah Hutton, had been with the store for 12 years, and the others, Kelly Evert and Paul Hanson, for six.
“Everybody leaves sooner or later, and it could be for a number of reasons,” Robinson told booksellers. “But you need to remember that your business is not the Hotel California. You can both check out and you can leave.”
The best time to start coming up with a succession plan is five years ago; the second-best time is today, said Robinson. Some of the reasons owners might want to leave their business include health, age, being tired of the day-to-day, or in reaction to a big business downturn. The first step in a successful succession plan, he said, is getting your business ready to sell.
“One thing that you need to do is think about how much it is that you need — not some fantasy number that you think your business might be worth because you put four decades of work into it, but what you will need in order to retire,” said Robinson.
For their part, the Robinsons wanted to have enough money in their retirement “to be able to choose the brand of dog food [they] bought.” Since they were selling the business internally, they did not have a full business appraisal done, although their accountant did do a quick one, which gave them more information with which to decide what they wanted and needed from the business.
But money is not the only aspect to consider in succession planning, said Robinson; happiness is also a factor, and the Robinsons were happy they could sell the business to three people who had been employees of Village Books and Paper Dreams for years.
“Our mission, the mission of Village Books, has always been building community, so we were happy to find people within our business who were interested in carrying on that mission and who share the values that we have,” said Robinson.
There are also cons to selling to someone internally versus externally; for example, there is a better chance that an outsider will have greater access to capital. At the same time, they may lack experience in the book business or a connection to the community.
Robinson ended his presentation by laying out seven key tips for succession planning:
1. Get lean, get clean: Physically clean the store and organize your records
2. Develop and document systems: Create a record as you go of how your business works
3. Build a team: Make sure you hire good people who stay on and learn the business
4. Consult your attorney: Seek help from your lawyer, accountant, or an outside broker
5. Create a transition timeline: Set deadlines for yourself
6. Develop a communications plan: Good communication with staff prevents surprises
7. Get out of the way: After the sale, don’t interfere too much
Following Robinson, Orndorff, whose firm provides business appraisal and transaction advisory services, said that in terms of succession, business owners have a few options, including selling to a related or unrelated party, liquidation, passing the business to family, or going public. Orndorff’s job involves providing valuations for businesses that are either getting ready to sell or that want to know if an offer is fair; the second aspect of his job — transaction advisory services — is to represent the business owner/seller in the context of a deal.
“The main thing that we always talk about with business owners is professionalizing your business,” said Orndorff. “Professionalizing your business for the most part entails becoming the CEO of your business instead of being everything to everybody. But a lot of independent small business owners are very entrenched in the business. If they were to sell the company, it would be a hard transition from them to the next owner.”
Having a staff of knowledgeable, professional employees to whom you can delegate authority, and maintaining accurate financial records that keep personal finances separate, will each help to make your business more transferable by eliminating risk, increasing stability, and easing the transition of ownership. Having accurate financial records also helps potential buyers know what they are buying and gauge whether your business will remain viable in the future. Orndorff recommends providing a CPA-prepared financial statement that measures sales volume and profitability for at least five years of your business.
“Buyers are going to want to know that what they’re buying is something they will be able to run into the future and it’s not just going to die on the vine when they take over,” Orndorff told booksellers. “That’s a function of your location, market, your industry, the town, the reputation of the business within the community, the fact that you’re able to transfer all of the knowledge you have of the business to them.”
From the buyer’s perspective, sales are just one of many factors to consider. Additionally, they will be looking at the health of inventory, credit with vendors, the value of fixed assets like furniture and computers, the strength of operation when it comes to buying, inventory management, and marketing, as well as your institutional clients and contracts, your ability to attract authors for events, the strength of your brand, and staff tenure and pay levels. Buyers will also want to know what your deliverable cash flow is likely to be based on historical data, and whether your business has a niche, which increases value.
The less risk perceived by the buyer, said Orndorff, the more interested they will be; a multiple of a business’ revenue is one basic metric used to determine how much a business is worth and will vary based on industry.
Orndorff closed by mentioning two helpful resources: the Business Reference Guide, which features rules of thumb for valuation as reported by business brokers. According to the guide, one way to value your business is at 15 to 20 percent of annual sales plus inventory. Another resource is Pratt’s Stats database, which compiles data on sales of businesses by brokers and is organized by industry. Booksellers can also turn to ABACUS, ABA’s annual financial survey, to compare their business’ financial data to the industry average and to businesses of the same size.
Booksellers can find the worksheet handed out at the session, which included an exhaustive list of tips and resources for succession planning, on BookWeb, as well as the PowerPoint presentation from the session.