It seemed so odd to me that almost as soon as I started growing my business, people began asking what my exit strategy was. I was 31 years old when our first location opened, and retirement was the farthest thing from my mind.
Before I could even contemplate leaving, I had to master key cutting and paint making and the uses of tens of thousands of items on our sales floor. I hadn’t grown up doing any of those things and it seemed nothing was going to come naturally.
As it turns out, starting to think about succession early on is a healthy course of action for all business owners for several reasons that began to make sense to me as we grew.
Having an end in mind necessitates focusing on the financial health of the business.
Optimising an exit strategy is infinitely easier when the books are in order. Sellers are asked to produce tax documentation, balance sheets, projections and possibly dozens of other types of reports so why not have them easily accessible throughout the life of the business?
If you’re always looking for exit opportunities, you’ll be alert when the right one presents itself.
So often business owners wait until they have to sell or are impatient to sell and then they have to go looking for the successor. If we’re open to opportunities, something might come along that makes the decision far easier, and if we’ve kept the financials in order, the rest could just fall into place.
This is really important at this point in history because there are so many business owners at or near retirement age. I know of several young owners who keep prospective lists of stores they want to buy, always at hand for the right opportunity. Conversely, when I purchased a 97-year-old store in 2015, it was obvious that the owner had kept me on his retirement plan list. I had never met him, but he had great insight as to how we run our business based on articles he had read about us over the years.
Selling costs time and money.
Knowing what is involved in selling a business can be tricky. There are all the legal and bank requirements and paperwork; a litany of I’s to dot and T’s to cross before you get to the finish line. I am always shocked at how long negotiations and transitions take, despite having gone through the process four or five times.
If you do your homework all along, this process should be less mysterious. We have had to use attorneys, bankers, business brokers and a host of other services to make deals happen. None of these requirements should sneak up on you. I read a story once about a retailer who locked up his shop in the middle of the night without any notice. He couldn’t bear the thought of telling anyone that he wanted to close so rather than try and sell the business, he walked away. To me, this is the saddest thing that can happen to a community focused business.
Not only did the gentlemen miss out on capitalising decades of hard work but his town lost its only hardware store.
When it came time for me to begin my exit, I wanted to make sure that my teammates and customers were all taken care of – meaning, that the jobs remained in our communities and there would still be welcoming places to shop for hardware needs. This meant exploring all of the options to create a smooth and successful transition for everyone and in order to do that, I needed to know who the stakeholders were.
My team – when we started growing in 2005, job creation was a favorite by-product to me. I wanted to employ hundreds of people and create places where they could build a career if that’s what they wanted. We weren’t just selling stuff; we were building a family.
Our neighbours – we built our business with communities in mind. We picked new locations based on their strong desire to support locally owned businesses so the thought of ensuring they could still shop at a local hardware store was of utmost importance.
Ownership – my husband Marc and I spent 20 years building a successful hardware business and we wanted to make sure we could maximise our return and leave our baby in good hands.
We had secured and paid off millions of dollars in loans over the years. We like to joke that “there are no tears in hardware” but our reward for two decades of blood, sweat and tears needed to feel equitable to us as stakeholders too.
There are several options to consider for your transition:
Family Members
Because the hardware industry is often multi-generational, the first option for a successful transition could be a family member. I’ve seen this work well and not so well over the years. In fact, I could probably write an entire column about those stories.
Planning for a family transition should include an educational path, leadership training, and experience in multiple facets of the business for the heir apparent. A good friend of mine put his son through college then shipped him off to work in other hardware stores before selling him the family business. He wanted to make sure his son had experienced how others lead and run their stores and that he was truly able to take on the challenge.
Teammates
If you don’t have family members to leave the business to, the first option might be a team member. Does a young leader stand out or seem interested in owning the whole thing? Could any of the team afford to buy it?
In these cases, a strong banking relationship could help with the transition, or you could finance the sale yourself if you wanted to. This not only facilitates the sale but could ensure that you are earning additional revenue for years down the road as your buyer pays you back with interest.
Business Entities or Others
Selling to another hardware store owner or someone in the community is also a possibility although vetting these options can be tricky. On one hand you need someone who can afford the purchase, but on the other, you need someone who won’t upset your culture and could smoothly step into ownership shoes.
Will the community respond positively? Will your team be receptive to the new owner in a way that won’t be disruptive? These are just a few questions to ask yourself.
There is also the possibility of selling to an investment company. In the U.S. Private Equity (PE) firms have money to burn and many are interested in the retail sector. They typically only consider retailers who have reached a threshold of revenue that is appealing to them and they’ll hold on to the business for five to seven years before putting it back up for sale. Oftentimes assets are stripped away to earn the PE owner more money, expenses are slashed, and the family-owned aspect diminishes significantly.
If we believe that businesses go through the cycle of life, much like human beings, then I want mine to be in an infinity loop. As the founder, this is the business I dreamed about growing for years and imagining it going away was unfathomable.
Nearly two decades after opening that first location, I found myself standing at the head of a conference room staring out at 38 of my teammates on August 3rd, 2021. I was ready to announce the next part of the journey, and how I intended to continue the loop. My hands were shaking uncharacteristically, my heart beating at 100 miles an hour. I had jotted some notes down as I had so many things I wanted to remember to say, I was sure I would forget something. My head and my heart were full. We were about to make the announcement that had been years in the making.
Most people think of an exit strategy as The End as opposed to a new beginning for the business. Even the phrase exit strategy evokes a sense of sayonara or see ya, wouldn’t wanna be ya. When I opened Logan Hardware in 2003, I hadn’t counted on becoming so attached to my team or this industry. But I was.
After exploring several options over the years, we ultimately decided to sell our business to our teammates in what is called in the U.S. an Employee Stock Ownership Exchange or ESOP. There are similar schemes I am sure in Ireland and this one is regulated by the U.S. Department of Labour and still fairly uncommon.
In order to begin the transaction, we secured a loan from our bank that was used to buy the business from us which will be paid off by the profits of the company. A professional valuation occurs every year thereafter and the profits are distributed into the accounts of the owners.
Anticipated benefits include easier recruiting, higher retention rates, a smooth transition out of the business for myself and Marc and an on-going hardware store for the community – a win-win for all the stakeholders.
The bottom line is this – We owe it to ourselves to start thinking about our succession from the moment we open our doors for business. It doesn’t matter if you won’t be ready to retire for several decades, thoughtful planning and a careful consideration of your options could ultimately help make the transition run smoothly and be beneficial to everyone.
Sometime around 2016 one of my teammates came to me and said, “You know Gina, this place is known as `Recovery Hardware` in the community”. That little phrase jumpstarted a book by the same name that tells so many beautiful stories of the people that helped grow our business. If you’d like to read more about them, you can order the book by searching for ‘Recovery Hardware’ by Gina Schaefer at Waterstones.com.
