Handing off a family-owned business to the next generation
The hot tub industry is poised for a large number of business handovers in the coming years as retail store owners prepare for retirement. Many of those businesses are family-owned, working to pass the ownership responsibilities on to a second and even a third generation.
Family businesses present unique challenges when owners decide to exit, and the sale is often fraught with emotional and financial hazards. There are ways to make the transition smooth, and the best way to start is with a plan.
Prioritize Early Planning
“Some family business owners think, since they want to transfer the business to their children, they do not need to make an exit plan,” says Colleen Kowalski, content manager at the Exit Planning Institute, an education company. “This way of thinking can be detrimental to the future successes of the business as well as family relationships.”
Without planning for all possible exit options, owners run the risk of not having a qualified successor in place when they are ready to retire. It leaves them with the choice of keeping the business in the family — even though the next generation is not qualified to run it — or selling to an outside buyer.
Kenny and Jennifer Clements are the second-generation owners of Pla-Mor Pools, a pool and spa store that also provides pool repair and service located in Richmond, Virginia. The business was founded by Kenny’s parents in 1968 and ownership transferred in 1993. With Kenny set to retire soon, he and Jennifer are starting to transition ownership of the business to their four sons, who range in age from 29 to 39.
Jennifer Clements says even though their sons grew up in the business, and she and Kenny hoped to pass it to one or more of them, it was never assumed that would happen.
“We have never pressured them in any way, shape or form,” Clements says. “We have told our kids that, whatever they choose, we support them. We just want them to be happy with their choice.”
All four sons work at Pla-Mor now and each brings unique and complementary skills to the business. Jennifer plans to reduce her workload to four days a week, and Kenny cut back to part-time work last August. He hopes to step fully away from day-to-day operations by the end of 2024, though he will still own Pla-Mor Pools.
“Our sons are still in a phase where we are teaching and guiding them on correct ownership practices, but they have already ‘owned’ the responsibilities we’ve put in front of them thus far,” Clements says.
With the financial structure the Clements’ have put in place, their sons will not buy the company from their parents but will receive it gradually as part of their inheritance. Working closely with an accountant and an estate lawyer, the couple is creating a revocable trust, with Jennifer as trustee and the four sons as equal beneficiaries.
“We’re trying to minimize the tax consequences for the boys,” Clements says, designing the transfer in a manner that doesn’t create a financial burden for the next generation. “My husband isn’t looking to not own the company for a while, but he is looking to get the boys on board, building their equity.” She says they don’t know exactly when he will turn over full ownership to their sons but will do so “when all the stars have aligned, so to speak.”
While their succession is still several years away from completion, Clements has advice for owners who are contemplating a similar move.
“Start early,” she says. “Start sooner than you think you need to, even if it’s just paying a consultation fee to sit down with a lawyer and get an idea of what some of the options are.”
Consider Your Retirement Goals
Kyle Danner, who worked in a family business in Kansas City, Missouri, for 17 years and now advises business owners, agrees with Clements’ advice.
“Part of the problem is that a lot of business owners haven’t made a plan for retirement and are not particularly well educated on all the aspects of exit planning,” Danner says. “You really want to start by asking, ‘What is my life going to look like after I exit the business?’ ”
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A lot of business owners haven’t made a plan for retirement and are not particularly well educated on all the aspects of exit planning. You really want to start by asking, ‘What is my life going to look like after I exit the business.’ “
Kyle Danner, EOS Worldwide
Retirees have many choices when it comes to ways to spend their leisure time, all with different costs. “A lot of times, they don’t have that personal plan in place with a price tag,” Danner says.
When business owners take stock of their retirement plan and assess the value of their business and all assets, they may find there is a gap between what they can realistically get from a sale and what they need to fund the retirement they want.
To close that gap requires the owner to increase the value of the business, which may involve building a leadership team, putting new processes and procedures in place, doing better financial management or making fundamental changes to the way the business is run. Typically, Danner says, a business owner should expect the transition process to take three to five years.
The path Danner outlines is like the one Amanda Annis took when she helped her father sell Ohio Pools & Spas. Her great-uncle started the pool construction business in Canton, Ohio, in 1957. Twenty-four years later, her father and his brother bought the business and started selling Hot Spring hot tubs, and Annis’ father eventually bought out his brother’s share of the business in 2008, a process that took several years.
Annis never intended to work in the family business, never mind owning it. After completing college and living on her own for several years, she returned to the business both to help her father and earn some money to pay off debts. During that time, she learned of her father’s desire to sell the business and retire. After a sale fell through, Annis decided to assist her father by doing deep reading and research into how to sell a business, even though she had no background in business or economics.
Annis learned the first step to take was make the business more profitable. After determining what her parents’ needs would be in retirement, Annis and some outside advisers began analyzing the company’s strengths and weaknesses and implementing new systems.
“It took a couple of years to get to this place,” Annis says. “It was not a quick process. We brought in outside consultants, so it was an expensive process, but it gave us good feedback on what was working and what wasn’t working in our business.”
The company saw improved profitability the following year, with even greater profitability the year after that, nearly doubling its annual revenue.
“That was really empowering for me,” Annis says. “That’s when it got really fun. That’s also when I started feeling like maybe I could keep doing this.”
When her father died unexpectedly in 2019, Annis decided to run the business herself, which in time led to her purchasing it from her mother.
For Annis, the journey from moving back home to earn some money at Ohio Pools to owning and running the show was an eight-year cram course in business. For family business owners in situations like hers, she offers this advice:
“Know where you are and the value of your business. Then find an attorney who has done business acquisition before. Let your attorney guide you and give you your options and figure out what’s right for you and your family. Don’t be afraid to reach out and ask for help, even from peers or others who have done a transition before.
Stay tuned for additional insights into post-hot tub life in future SpaRetailer issues.