This article originally appeared in WQP May 2020 issue as "Recipe for Succession"
What is your recipe for succession? Whether you just launched a new company or you have been in the business for 30-plus years, a succession plan is vital to ensuring your hard work is undertaken with an end goal in mind. Moreover, the more prepared you are today, the more successful your succession, and ultimately, retirement will be tomorrow.
Mike McGowan, vice president for McGowan Water Conditioning, and Bret Tangley, president and owner of Sterling Water Inc., have both seen their fair share of successful and unsuccessful succession plans in action over the years. McGowan is the third generation to own McGowan Water Conditioning, which was founded by his grandfather in 1955, and Tangley is the third generation to own and operate Sterling Water Inc., which was started by his grandparents in 1949. While both received little to no pressure from their families to join the family business, they received very different training throughout their ownership transition.
A Natural Choice
Tangley, who is a long-time advocate for the water quality improvement industry and was inducted into the Water Quality Association (WQA) Hall of Fame in 2016, thought at one point he would pursue a career in law but soon found his transition into the water treatment industry to be rather natural. In fact, he cites “no regrets” in his decision to join the family business rather than chase an alternative career.
“It was not pressure,” Tangley said of his choice to continue his family’s legacy through the business. “I really view it as an honor. I could see how important it was to [my parents] and then subsequently, how important it was for me to do it and do it right and to continue to build off the legacy and the wonderful things that they established and did in their terms.”
Tangley spent summers working at the family business when he was in school, working in a variety of jobs from the ground up and learning every aspect of the business. When it came time for him to make the choice between staying in the family business or pursuing a career in the field of his undergraduate degree, the choice came naturally.
“I realized quickly that there were not going to be jobs for me at that point in my life that had more accountability and where I had more responsibility and opportunity than that one,” Tangley recalled. “All those things were more evident for me there than they would have been anywhere else.”
Over the years, Tangley continued to work through a variety of roles at the company, some of them “not very glamorous,” and received encouragement and mentorship from his family and peers. He was encouraged to participate in and witness key decisions until the leadership transition felt natural in 2008. After the transition, while Tangley was encouraged to embrace ownership, he knew that he was never alone. His father gradually decreased his presence at the office, but Tangley knew he could always call his family, long-time employees or fellow Culligan dealer John Packard for advice when needed. Still, he acknowledges he was fortunate in his transition.
“I’m not going to lie to you, I had an opportunity that not everybody gets,” Tangley admitted. “I know that I was granted an opportunity, and that is a blessing and a gift that not everybody gets. I am determined to turn that opportunity into something that makes my family proud.”
From the Ground Up
McGowan, on the other hand, received less training throughout his leadership transition. While he too worked his way from the ground up throughout the company from a young age, he jokingly recalled the training he received to take over the leadership of the family business was “absolutely none.” He had not always planned to take over the family business but had a plethora of ideas to take the company into the age of technology which prompted his dad, the then owner, to tell him to “put your money where your mouth is” and begin to hand the reins of the business over to McGowan.
McGowan’s father then began to pull back on his presence in the business, but a formal transition of ownership did not happen until several instances occurred that made it clear the transition needed to occur.
One such instance was when a company truck broke down unexpectedly and a new truck was needed, but McGowan’s parents happened to be on vacation at the time. Another instance that brought the need into clearer perspective was when McGowan’s father had a minor heart attack. Regarding the actual transition of ownership, which occurred in 2006, the company was first divided 50/50 between McGowan’s mother and father, and then McGowan agreed to buy out their ownership at 5% a year total.
“When we set this up with the attorney, they set it up as if they are selling it to anybody else on the street,” McGowan said. “What I mean by that is that there are clauses in this purchase agreement that if I, you know, go insane, they can buy the stock back.”
Though Tangley and McGowan’s ownership transition stories differ in some ways, they both agree that a clear end goal and clear financials are vital to a smooth transition.
“One of the most valuable things that this article should say is that when you decide that you want to own or purchase a business, the decision to do that should be closely followed with what your goal and desire is and how are you going to exit or sell it,” Tangley stressed.
How to Craft Your Succession Plan
So you understand the need for an exit strategy and clear succession plan is paramount, but who can you entrust your business to? There are a few potential options, including:
- Selling to family;
- Selling to an employee or employees; or
- Selling to an outside party.
Selling to family. First, often the most straightforward solution is to sell or hand-off your business to a family member. This succession plan does not make sense for everyone, however. Even if you have descendents, they may not want to take over leadership.
“There is certainly some pride in having your family name above the door and carrying on the family tradition,” McGowan said. “But I have seven older brothers and sisters and they all said ‘no thanks.’”
Moreover, they may not be the right fit to lead your business. If you are considering a family succession plan, it is important to critically evaluate the fit and avoid pressuring family members who may not be the right fit. Additionally, both Tangley and McGowan stressed the need to protect your assets even when selling to family. After all, the successful succession of your business is likely a large part of your retirement plan.
“If you own a business, it is your biggest asset,” Tangley said. “You need to care for it, strategize with it, and think about how you are going to take that asset and leverage it eventually, and exit and create wealth from it.”
Sell to an employee or employees. The next logical option is to sell your business to an employee or employees. In this situation, just as in selling to a family member, mentorship of the employee or employees should likely play a key role in finding the right fit and setting the succession up for success.
While uncommon, a handful of water treatment dealers have used an employee stock ownership plan (ESOP) to successfully grant employees ownership of a business as a succession plan. Tangley referenced Total Water Treatment Systems in Madison, Wisconsin, as one such success story. Though this succession plan may not be suitable for everyone, it is an important option to be aware of and to consider.
Sell to an outside party. Finally, selling your business to an outside party can be a successful succession plan. The two key challenges of this option are finding an outside party that meets your financial needs and ensuring that the buyer is the right fit to take over your business. When selling your business to a family member or employee/employees, that party would likely already have a firm understanding of your business’ operations and key values. Whereas when you choose to sell to an outside party, those safeguards may not exist. There are, however, a few processes you can set in place to streamline the process and minimize those obstacles.
If you are considering selling to an outside party, creating a “playbook” for your business can help smooth transitions, as well as ensure you are prepared in the unfortunate event a key member of personnel unexpectedly becomes ill, McGowan said. The playbook, or “drop dead book” as McGowan calls it, should serve as a guide to run your business, including key contacts and steps to complete routine projects and roles. Having this guide prepared in advance can ease a transition and encourage a prospect to invest in your business, he said.
Another important aspect to help improve the process of finding an outside party to invest in your business is networking. You should not just be networking towards the end of your career when you are looking to sell your business but throughout your career to build relationships so you and your business are top of mind when members of your network are ready to invest. In fact, McGowan is not shy about the fact that he hopes to leverage his extensive professional network if there is ever a shift in the needs of his business or career.
“That’s why I love being involved with WQA (Water Quality Association). I want to know all the players,” he said. “I want to know the other big dealers. I want to know the manufacturers. I want to know the suppliers. Because, you know, if I am ever looking for a job, I just want to know them all.”
What Is Your Recipe for Succession?
No matter what form your succession plan takes, remember to protect yourself financially and have a contingency plan. Additionally, if you are not thinking about succession right now, you should be. Even if you are in the early stages of your career, your ultimate goal should be to generate wealth from your business that ensures a successful retirement. So, what is your recipe for succession?
“‘Who’ I don’t have clarity about and ‘when’ I don’t have clarity about, but ‘how’ and ‘what’ I do have clarity about for my transition and my succession plan,” Tangley said.