As baby boomers move into their golden years, retirement and legacy planning have become increasingly critical aspects of business leadership across all segments of the economy. That’s especially true for industries like ours, in which success is often driven by owners’ knowledge and skills.
Although planning for retirement should be a priority for all business leaders, the numbers paint a chilling picture for small company owners approaching retirement age. According to a recent study by the Guardian Life Small Business Institute, only 45% of small business owners think they’ll be ready for retirement when they reach retirement age, and a third say they don’t plan to retire until after they turn 70.
All of this comes at a time when the number of people turning 65 — 10,000 people each day in the U.S., according to the Census Bureau — has more than doubled in the last 20 years. In the pool and spa industry, the effects of an aging workforce have become self-evident.
“We know our industry is getting older,” says Rod Sterling, founder of the Sterling Advisory Group. “We know it demographically and we know it anecdotally. All you have to do is go to a pool and spa trade show and look at all the gray hair, or no hair. I like to say our senior class is retiring and the incoming freshman class is much, much smaller.”
According to Scot Hunsaker, managing partner of the Ardent Group and author of “Heroic Ownership,” a book about transferring company ownership: “Our industry has tremendous experience and institutional knowledge, but it does not have a deep bench.”
HAND IT OVER
In other words, the industry is lacking in the future-owner department, which makes identifying your company’s future leadership both crucial and often extremely difficult.
“According to statistics I’ve seen, 80% of CEOs say they want to sell it to an insider, but only about 13% actually pull it off,” Hunsaker says. “That’s how you end up with so many companies failing to transfer their company to the next leadership team and that means they go out of business. The reasons that those numbers are so eye opening isn’t because we don’t know how to do it, it’s that we don’t get around to it. People say that they’ll get to it tomorrow and they never do until it’s too late.”
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Ahead of finding someone to buy the company and take over management (discussed in greater detail below) business owners first need to determine what their companies are worth. “Most business owners I know have a financial planner and some kind of plan for retirement,” Sterling says. “Their number-one asset is usually their business. My question is how can you plan for retirement if you don’t know what your business is worth? Most business owners think their company is worth more than it really is. But there are those that find out that it’s worth more than they thought, and they can retire sooner. If it’s not worth as much, they’ve got a big gap. Either way, it’s crazy to try to sell your business unless you know its value.”
Hunsaker adds that understanding the value of the business isn’t just about revenue, it also means seeing where the expertise needed for informed decision making lies within your organization.
“We have a ton of very successful businesses in the recreational aquatics industry, and I would bet most of them are led by people who are over 55,” he says. “I believe that the vast majority of institutional knowledge and business savvy exists in the minds and experience of our aging small business owners. I think of it this way: In a manufacturing business, you have a machine that makes the widget no matter who’s in charge. In our industry, 80% of the ‘machines’ walk out the door at the end of the day and drive home.”
FOR WHAT IT’S WORTH
Sterling’s firm has conducted valuations for small businesses in the pool and spa industry since 1996, mostly for the buyer. “Once the seller figures out what the company is really worth,” he says, “the buyer and their financial institution want to see that confirmed from a third party. They want to know where the number came from and who says so.”
Calculating the value involves a variety of factors, including determining the seller’s discretionary cash flow, which Sterling uses to “recast” calculated value. “I call it pulling the pepper from the grits,” he says. “If you look at most companies’ tax returns, on paper they don’t look like they’re worth much because the owners are trying to show as little income as possible in order to avoid paying taxes. But if you look at all of the things the owners are taking out of the business – their family cell phone plans, vehicle expenses, health insurance, pensions and who knows what else – the multipliers can really increase. There’s a lot of hidden wealth in the dealer segment of the industry and it can come as a surprise to a lot of people when they see just how much they are taking from the business.”
For owners considering selling their business, Sterling routinely offers guidance about maintaining and maximizing company value, a process that has led to a surprising revelation. “Pool service companies actually have the highest multipliers,” he says. “That may come as a surprise to some people because of the culture of our industry, but service companies have recurring revenue streams, which is the foundation for their value and it’s a very straightforward calculation. Companies that have retail operations or a construction operation along with service and repair, those companies are also well positioned because they have multiple sources of revenue.”
WHO’S THE BUYER?
Finding a qualified buyer who is willing and able to take over the leadership role is arguably the greatest challenge facing small business owners today. “It’s very difficult to find a buyer in this industry,” Sterling says. “The reason is that it’s a very narrow band of people who are interested.”
That challenge, he adds, is exacerbated by a reluctance on the part of owners’ children to step into the business. “There are a lot of factors involved, including the fact that many industry people want something different for their kids, so they send them off to college to learn how to do something other than work in the pool and spa business,” Sterling adds.
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Nonetheless, finding the right person in house remains the preferred path for many owners. “You can sell to someone you know or you can sell to a stranger. Obviously, selling to a stranger is the tougher way to go,” Alice Cunningham says. The former co-owner of Olympic Hot Tub and her business partner/ husband Blaire Osborn stepped away from the business in 2016 when they sold the company to longtime employee Don Riling.
“The best thing for us was selling it to someone who worked for us, who had been with us for 20 years. He started in our sales department, on the bottom rung and worked his way up in the company,” she says. “He had a complete understanding of what the business was about and what the industry is about.”
Cunningham says that the combination of Riling’s experience and willingness to sustain the company’s values and service-based approach were keys in the decision to hand him the reins. “He was obviously the choice and was willing to take it on,” she recalls. “That’s something I think small business leaders really need to look at; you’ve got to hire people who are better than you are at doing their jobs. At some point, there are people who are going to step up and say, ‘I want to do more.’ They might want to move into the financial side of the business or work in service, or manage this, that or the other. If you only hire people that stay as underlings and constantly require your direction, A, you’re going to be tired out, and B, you’ll never find that person who can step up.”
Three years after the transition, Cunningham reports that it all has unfolded according to plan. “Don’s been fantastic. We don’t worry about it because we know the company is in the right hands,” she says. “We wanted the culture we had developed to continue and we didn’t want to have major changes in the way the customers are treated, or vendors or employees.
“Being an employee is a whole different mentality from being an owner or manager,” she adds. “That’s why, as an owner, you should grow a garden of people who not only know their jobs inside and out, but they see the bigger picture and want to see the whole thing continue.”
WHAT YOU KNOW
Although growing that garden of managers is a multifaceted challenge, the biggest part of the process is transferring knowledge.
Hunsaker, who works with owners making the transition to retirement, originally came into the pool industry when he bought the legendary design/ build firm Councilman Hunsaker from his father, Joe Hunsaker.
“When I purchased the firm from my dad, I didn’t have his background and didn’t have his knowledge,” he recalls. “What I saw was this great family resource and contribution to the industry. It would have been a shame to see that go away. I joined the business in 1989 and over a period of time tried to learn as much as I could about the business and the industry.
“I noticed that in this industry, most of the knowledge resides in the owner. That can be a real problem because if there aren’t other people in the company that know how to do everything necessary to keep the business running successfully, there’s nothing to sell. I learned how important it is to transfer your knowledge and business savvy to the next team of leaders. It gives you options for the future. Even if you sell it to a third party, it will make the company more valuable. Or, you can transfer it to your employees. Now you have choices.”
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That’s why Hunsaker suggests business owners develop a small pool of potential leaders rather than selecting one person to assume the title as the next company leader.
“I think a better strategy is to select a leadership bench of strong candidates. Maybe four or five people who show the kind of aptitude and personal characteristics you think will make for a good leader, and then over time, you let the natural leader emerge. One of the advantages of that approach is that the other team members will have seen that person emerge and will likely have confidence in them, so when there’s a change of leadership, they don’t leave.”
By investing the time to develop your bench, you give yourself ample opportunity transfer the knowledge needed to make good decisions. “It’s all about managing change,” he says. “If things never changed, you wouldn’t really need managers, but that’s not the way the world works. We have to teach that management leadership team to manage change, and also how to identify that change and understand it and how to take advantage of change rather than be harmed by it. That’s why I talk about transferring institutional knowledge and business savvy.”
