A Look at Internal Succession

The employee buyout experience

Ah, retirement.

It’s a bittersweet word for longtime business owners to think about. But think about it they must. Many of today’s spa retailers started their hot tub businesses in the ’70s and ’80s, so retirement is edging closer.   

But how do owners leave a business they’ve dedicated decades to? As discussed in our succession planning series, selling to family is one option; so is setting up an employee stock ownership plan

But internal succession, selling to an employee, is another popular route.

Internally succeeding

It took an hour and a half for Troy Schneider to close on buying a business. 

He accepted the reins of The Spa & Pool Place from his boss, John Kunkle, in January 2024. A solid accountant, an excellent lawyer and an enthusiasm for the industry helped seal the deal. 

Kunkle, 65, couldn’t be happier as he’s well on his way to retirement. 

For Schneider, who always had an interest in business, buying out the company felt like the next natural step. In 2003, he unknowingly started a lifelong career at The Spa & Pool Place when he needed a summer job while attending Penn State. As a history major, he felt he’d hit a wall and found an interest in the spa and pool world.

“They dumped on a lot of responsibility on me at a young age,” he says of those early years at The Spa & Pool Place, located in Willow Street, Pennsylvania. 

Throughout his time there, he learned everything he could about running a business well, and last year, Kunkle approached Schneider to see if he wanted to buy the business. 

After doing research, including having a full-service accounting firm review and report on the state of finances, Schneider felt ready to make the move.

He and Kunkle decided on a down payment and structured the business as an S corp, which allows it to pass corporate income, losses, deductions and credits through to shareholders for federal tax purposes. 

Schneider bought shares and now owns 100% of the equity in the business.  

The business pays Kunkle directly. Each month, the loan is paid back on an amortization schedule and can be paid off early. 

Even after officially turning over his ownership status in January, Kunkle still works three days a week doing field work and sales.

“There have been some changes, but in general, the transition went fairly smoothly,” Schneider says, noting he also has long-term employees who he leans on. 

“As we get into our busy season, it’s a bit of a shock sometimes with how much more stuff there is to do,” Schneider says of his new boss status. “I had some awareness of things, but when the decision-making ends with you on all these levels, it’s something to be prepared for.” 

Anyone buying a business should factor in the time it takes to build strong systems and structure, Schneider says.

“The more robust they are, the easier the transition will be,” he says.

Trevis A. Nickel, the CPA used by Schneider, says it’s important for potential buyers to know the daily business operations.

“Get involved with every aspect of the business, including billing, scheduling, inventory purchasing, hiring, etc. before the transition,” Nickel says. “This will help the employee see what they are getting into and make sure it is something they will enjoy.”

Internal Succession -- The Spa & Pool Place
After 20 years as an employee of The Spa & Pool Place, Troy Schneider, left, purchased the business from owner John Kunkle in January 2024, paving the way for Kunkle’s retirement.

Get your ‘ducks in a row’

For spa retailers who don’t give thought to the preparation of selling their business, it’s a rough exit — only around 20%-30% of those that go to market sell, according to the Exit Planning Institute, an education company.

When selling a business, organized bookkeeping is essential. It should be a priority well ahead of any roundtable discussions that include business attorneys or accountants. 

“The owners who want to sell their business, however they decide to do it, better have their ducks in a row,” says Kelly King, former owner of Mountain Hot Tub in Montana. “The prospective buyer — or the bank funding the purchase — will certainly be looking at every little detail in the financials. By then, it’s too late to make excuses or try to clean things up.” 

King advises hiring an outside expert like an accounting firm to help. 

Additionally, knowing numbers helps move the transaction along smoothly for both parties. Nickel says when the business is used as a loan — the selling owner lending the money to the purchasing owner to finance the purchase — most sellers are looking to get between 10%-20% of a down payment. Doing so offers tax benefits to both sides, and the seller avoids capital gains taxes they’d have to pay on a lump sum. Along with potentially avoiding additional fees and paperwork, Nickel says going this route generally allows the purchaser to get a better interest rate than they could with a conventional loan through a financial insitution. 

Be open to learning 

When it comes to preparation for a sale, carve out time to learn. 

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Ron Perkins of Seven Seas Pools & Spas purchased five stores from his wife’s cousin in 2023. It took 12 years of ongoing discussions, pivots and learning from the original owner before he officially took over with a 10-year buyout loan. 

Perkins says a willingness to learn workflows, financial expectations and other business aspects provides a lot of value for an employee turned buyer. For longer-haul transitions like Perkins’, he found his team looked to him more often as the former owner faded into the background, allowing Perkins more hands-on access.

“It’s got to be somebody you trust to let them have control,” Perkins says of owners selling to employees. Perkins had free rein to start hiring and training people well before the official sale documents were signed, which made for an easier transition once the sale happened. By that time, Perkins served as the leader and go-to person, not the company’s previous owner, Dan Carroll. 

 In Perkins’ case, Carroll had experienced the buyout process before.  

 “He had an idea of how to structure it and the loans,” Perkins says. “Dan was the one who helped finance this whole thing.” 

For new owners looking for further education, King says taking business classes and reading business books like “The Great Game of Business,” “The E-Myth” or “Customers for Life” are all ways to get into an entrepreneur mindset.

A lot of employees who think they want to own the company think that if they are really good at their job and have access to the company’s checkbook, they would have what it takes.”

Kelly King, Mountain Hot Tub

“I believe a lot of employees who think they want to own the company think that if they are really good at their job and have access to the company’s checkbook, they would have what it takes,” King says, noting there is much more that must be considered, namely “the weight of the responsibility to see that their employees are taken care of, to have a good working environment, to put food on their table and pay their rent.”

Kelly King, former owner of Mountain Hot Tub, hands the keys of the store over to Tim White. Though White was an outside buyer, he included key employees into the business purchase as owners.

Take time to assess

One aspect many new owners agree on: Try to gain as much insight as possible before calling in a team for a buyout. King says an employee looking at purchasing from their boss must know the scope of the business beyond their job.  

“One should have a deep understanding of how to read a profit and loss sheet, a balance sheet and cash flow reports,” King says. “If the boss is willing to share those things — the employee may just have to come out and ask — it not only is pertinent to running the business, it shows the owner that they are truly interested and willing to invest their time in learning the business, which makes them a more valuable employee.” 

Additionally, the most successful and slightly less stressful transitions are the ones that take place over years, not months. Otherwise, it’s easy to slip up and make mistakes — like paying too much as Don Riling of Olympic Hot Tub felt he did. 

Riling bought Olympic Hot Tub several years ago from its founders Blair Osborn and Alice Cunningham. Thinking back, he says he’d do certain things differently, but he mainly wishes he’d better educated himself on the right way to buy a business. Getting a proper valuation done helps buyers know whether they should spend their money or go through a bank to fund the process. 

For Riling, after his Small Business Administration loan application fell through, his plans propelled forward much faster than he initially hoped. 

“It was so fast, I barely had time to have an attorney look at everything and negotiate and work on it,” recalls Riling, who says announcements to trade publications had gone out and he felt pressured to move the transaction faster. “I felt like we were on a fast track that I couldn’t get off of, so I had to roll with it.”

Riling says that while he felt intellectually ready to buy out the business from the owners he’d known for 21 years, financially it was a different story. That’s why he urges employees seeking to buy to look at spreadsheets, talk to the accountants and understand the bottom line well. 

Right now, Riling has an employee in mind to buy his business one day and feels this employee is far more prepared than he ever was. As a result, Riling invites him to come along for lease negotiations for new locations and makes it clear to the employee that he is a part of the internal succession plan. 

“I involve him in benefits meetings; I involve him in things that I was not necessarily as adept at or had as much knowledge as I should have when I did,” says Riling of his own buying experience. “The more that you do that with key employees, the better prepared they are to understand everything that they’re going to have to do.”

Kelly and Shirley King, right, pose with Tim and Libby White outside of the Mountain Hot Tub storefront.

Leaving the business in good hands

A solid exit plan comes down to knowing the spa retail “baby” is going to do well. 

That was particularly important to King when he sold his business to an outside buyer who also included key employees as buyers. The decision was two-fold — it allowed King to sell his business profitably while also considering his current employees’ needs. 

He and his wife Shirley had built a successful business that upheld the importance of giving back by being involved in the community, but they had seen plenty of industry friends sell to large corporations and enjoy retirement life with big paychecks. 

The Kings wanted to keep it more intimate. 

“It was our baby,” Kelly King says. “We wanted to see that community involvement continue and how our employees would still enjoy their jobs and the work environment.”

Tim White, who owned a spa company out of Steamboat Springs, Colorado, wanted to expand into the Kings’ territory and knew the industry well. In 2021, they did a valuation and insisted that part of the arrangement included key managers to purchase the company and be owners themselves. 

“That was the final straw for us that made a lot of sense,” King says of selling to White. “Instead of an ESOP, where typically I as an owner would have an obligation to stay on board for some time, Shirley and I decided we would rather not be involved in the business and wanted to completely retire.”

While it was difficult letting go and diving straight into retirement, King says selling to former employees plus an outside buyer worked out even better than he had hoped. 

“The joy I’ve had running the business, creating jobs, supporting our community and making a workplace that people want to work at has been extremely rewarding,” King says. “So is the reward of selling the business — to see it continue to prosper in ways I couldn’t have imagined. It all started with taking the first step towards buying it.”