Succession by Design

A “Silver Tsunami” is about to engulf Michigan, and thousands of businesses will go on the market as baby boomers retire. For best results, owners should start planning today.
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a man standing behind a podium in the top left next to woman standing beside a building diorama to the right. A member of the crowd they're presenting to looks back with a concerned face.
Illustrations by Brian Britigan

As he was nearing his 60th birthday, Carl Matisse happened to be conferring with his banker when a provocative question came up: Had he planned for the succession of his business, in order to retire?

“Not really,” recalls Matisse, now 61 years old and president of Summit Properties, a general contractor in Clarkston operating nationwide on commercial renovations and construction projects. “At some point, I’ll sell it,” he continued. “It’s got value.”

His banker encouraged him to pursue a succession strategy without delay. “You’ve got to develop a plan,” he instructed. “Let me introduce you to a guy.”

It was the start of an awakening for Matisse. He had founded Summit Properties in 1994 with a few partners, and for years the company specialized in custom-home building. After the 2008 financial crisis, the business had to be reinvented to stay vital. “We began doing some commercial work and have grown the business,” Matisse says. “Our sales were about $5 million a year (in 2009), and are $50 million a year today.” Clients include fast-food restaurants, pharmacies, fuel stations, grocery stores, and banks. Unlike custom-home building, repeat patronage is a standard part of the action.

In the year and a half since that meeting in the bank, Matisse and his partners have worked out a plan that will ease him out of the picture — and it won’t be a transfer within the family. His adult son and two daughters have gone into medicine, law, and education. “They didn’t have any interest (in the business), and that was fine,” he says.

Instead, a handful of key employees are being set up to buy the company.

The succession plan is attractive to the employee-buyers because Summit has the right things going for it in accordance with a well-established, if not universally known, formula that helps to consolidate and increase the value in a business.

The first of these things, of course, is today’s profitability. If Summit had remained a custom-home builder, Matisse may have kept making money, but the switch to commercial work brought in far greater revenue. The second and third points of the formula address whether that profitability can be sustained, and how much more growth can be realized. Summit today has 94 employees working from offices in six large cities.

“Being in this business, it’s actually sustainable, and I can retire and walk away,” Matisse says. “Everybody else that’s in the business can continue to serve our clients and continue to earn money and work. So, all of a sudden, there was a value in my business.”

Matisse’s experience is a lesson for tens of thousands of Michigan business owners who will be retiring in the next decade or so. By 2035, seniors will, for the first time, outnumber children under 18 years old, but Kurt Metzger, founder of Data Driven Detroit, has written in the Oakland County Times that Michigan “will experience this shift much earlier than the nation.” Oakland County offers a vivid example of the trend over the past 30 years, with a declining birthrate as compared to deaths. “The economic downturn we experienced after 2000 led to a great deal of out-migration and a relatively rapid reduction in births,” Metzger says.

The full-court press is on, and some business owners will find themselves trapped in a corner with no time-outs remaining. But as Matisse has demonstrated, it’s possible to act early, find an opening, and advance downcourt.

The good news is, much thought has already gone into the issue, and big-picture thinkers have developed and refined a number of practical steps to help with succession planning. Perhaps the best handbook is “Built to Sell: Creating a Business That Can Thrive Without You,” a work by Toronto author John Warrillow that’s now in its 22nd printing.

Warrillow demonstrates his principles through a fictional narrative in which the main character, Alex Stapleton, owner of a small graphic design shop, decides he’s had it and wants to sell the business. He consults with a mentor who throws out a series of challenges to help him prepare for a sale. In the initial deflating meeting, it’s determined that Alex’s business doesn’t have as much value as he might think. Several factors contribute to the situation, and the challenge is to correct them before enlisting a business broker to sell the enterprise.

The full-court press is on, and some business owners will find themselves trapped in a corner with no time outs remaining. But as Matisse has demonstrated, it’s possible to act early, find an opening,
and advance downcourt.

The biggest shortcomings are that the graphic design shop is too generalized, is dominated by one large client that represents about 40 percent of revenue, and depends too much upon the charisma and personal touch of the owner himself. There’s neither a management structure in place nor a real direction for the company, so it’s unsustainable and therefore of little value if Alex drops out of the picture. Additionally, there’s no way to scale up the business.

In Warrillow’s fictional story-within-the-story, Alex makes some big changes, firing his largest client and reorienting the business toward a specialized service. Instead of meeting all the client’s needs by designing everything from brochures to websites, the company focuses on its strength: creating logos. For Alex, the first step is to define the technique by writing out guidelines for his Five-Step Logo Design Process. He soon finds that not only do his employees perform better, but the process itself becomes a sales feature. By standardizing the service, Alex is able to charge up front, helping to generate a positive cash-flow cycle.

Taking the next step, Alex promotes a couple of top employees to vice presidents and hires two sales reps; the release of new energy leads to growth and even to repeat orders as clients themselves expand and introduce new products and services that require logos.

As a result, the Stapleton Agency no longer experiences those painfully constrained periods when the dominant client is late with payment, and Alex is able to stop groveling and focus more on strategy and planning. The rebalanced organization becomes much more attractive, and after giving consideration to his top staff in the deal, he’s able to transfer the business to new ownership and reap the desired benefits.

By means of his book, as well as related courses and seminars, Warrillow has made a disciple of John Carter. In 2015, Carter founded Absolute Succession, a consulting firm in Bloomfield Hills. Working as an M&A attorney for more than 20 years, he had kept seeing what he calls “lifestyle businesses” that generated revenue for the owners but weren’t built to be sold. Too often, they depended on the owner’s panache, reflecting a weak organizational structure and a lack of sustainability.

Carter found exit planning to be “a calling for me” because of his understanding of the nuances. “There’s such a massive number of people that are going to exit their businesses and exit the economy, if you look at the statistics, in the next 10 years to 12 years — it’s unbelievable,” he says. “This is going to be the largest wealth transfer we’ve ever seen in our lifetime — and, frankly, over the last 100 years.”

He poses the question of who will buy out the boomers. The problem is that Generation X is a smaller group. “We’re a microcosm,” he says. “The math is bad for the boomers. It doesn’t matter — you can have an awesome company that’s highly profitable, (but) you’re still going to have a hard time, potentially, because of competing with all the other businesses that want to leave at the same time. There’s just not enough buyers.”

When families were larger, the family business stayed that way. But the tradition of passing a business along to descendants is hardly a certainty nowadays. As with Matisse’s son and daughters, children are sometimes inclined to follow their own passions. Or they simply don’t want to work so hard and assume so much responsibility. “They just watched their parents, for the last 20 years, kill themselves,” Carter says. “They love the fact they can drive Cadillac Escalades; they don’t like the idea, though, that they have to be responsible for the business, for its employees — and throw in COVID-19 and all this other stuff.”

Too often, the parents wait too long to start talking to family members about succession, and when the implied notion about a takeover proves untenable, the sellers are cornered. Whereas the business had always been viewed as a source of retirement security, the question now arises as to whether it has any transferable value at all. Matisse soon came to understand the classic nature of his pre-2008 situation. “Originally being a custom-home builder, I was only as good as my next project,” he says. “So, if you decide you’re going to retire, hopefully you’ve saved some money and you retire accordingly.”

Smiling people in business garb wearing CEO nametagsIn his role as an M&A attorney, Carter frequently encountered the opposite, and it was a source of unhappiness for prospective sellers. “We would go through the sale process, and these owners would close, and they would never get the terms or the money that they needed up front,” he says. “All of it was seller financing.”

The seller may even have stayed on to operate the business and gain an earn-out, a sort of bonus, after a defined period. “They couldn’t negotiate the terms that would allow them to live the life they wanted.” But getting 35 cents to 40 cents on the dollar in such a scenario, Carter says, can lead to humiliating revelations. “Now they’ve got to go back and tell their wife, ‘Hey, honey, (after) sacrificing all those anniversaries, those birthdays, all those weekends that I did for years, now we have a pittance to live on, or worse.’ ”

Around the same time Matisse listened and acted on his banker’s advice, Wes Mathews was the hard-driving CEO of High Level Marketing, the digital marketing agency he started 15 years ago. The married father of four kids was facing his 40th birthday and feeling a bit burned out. Until the pandemic, High Level had a staff of about 50 people working in a West Bloomfield office. The team is now working 100-percent remotely, but Mathews intends to relaunch an office in the Detroit area and look to operate in three other cities.

Back in February, High Level Marketing completed a merger with Bell Media of Birmingham, Ala., going from a $6.5-million niche company to a $20 million midsize player in an industry that has just a couple of what Mathews terms “behemoths.” While he used to measure himself and his success by the number of hours worked in a day, he has stepped back to serve as chief revenue officer and finds himself with more time for his personal life.

“I have a lot of confidence in the new CEO to grow, scale, and drive the organization, and thought I could add better value as chief revenue officer, which is building on relationships, people, and sales,” Mathews says. “I think we have an opportunity to really grow this company into a $100 million-plus organization and create a lot of opportunity along the way.”

He calls the initiation of the merger “serendipitous.” Being, as he says, “an entrepreneur at heart,” he realized his own limitations. “I kind of felt, as the entrepreneur, I was stuck. I had to look inward and say, ‘Hey, is it stuck because of me?’ ” His partner had been “waving the SOS flag” for about a year, saying, “If I had this amount of money, I’m good.”

Mathews and the leaders of Bell Media were able to work out a deal through video conferences over about three months. Working with a consultant, he kept his team in the loop. “People kind of felt like, ‘You know what? This makes sense because it was a strategic move to help grow and invest in the business.’ So the whole goal was to keep the team intact and create a lot of opportunity.”

During the merger process, Mathews went through “mental warfare” as he conformed to the natural tendency to vacillate. “There were many times when I was all-in on the deal, ready to move forward, and then the next day I was violently against it.” Nevertheless, he was in a good position to set his terms. He gives some of the credit for the well-structured organization to his study of EOS, the Entrepreneurial Operating System, and to activities with EO, the Entrepreneurs’ Organization.

EOS has a six-part formula for business excellence. Much as in “Built to Sell,” EOS promises to drive profits, consistency, and scalability in its members’ organizations. The proprietary toolkit includes books, a smartphone app, an analysis program, and tutorials. Membership in EO, on the other hand, also entails exposure to educational content, but opens connections with other EO members.

“EOS and EO changed my life,” Mathews says. “I used to have an ego, used to be like, ‘Alright, I’m the guy, I’m the CEO.’ Once I educated myself and gained experience, I got smarter and I started hiring smarter people than me.”

Carter rates Mathews’ High Level Marketing among the estimated 20 percent to 30 percent of companies that are more or less turnkey opportunities and ready to be sold. “By coincidence or just good instincts,” Carter says, “the owners have built enough transferable value in their businesses that they are highly attractive to outside buyers, because they have the value-drivers already installed.”

For the other 70 percent to 80 percent of owners, it’s going to be less instantaneous — in fact, it may be a long, intrusive ordeal. The consensus is business owners who are contemplating an eventual sale should start early, and get advice from professionals like accountants and lawyers before pursing the right broker or M&A firm to market the business.

But for all of the pains expended in building the company, there may be more pains ahead as the broker looks through records and data, critically evaluates every process, and makes recommendations to implement additional improvements. And that’s if the broker is really working for the commission, instead of treating the client as a kind of commodity and navigating within narrow channels to find a buyer. “Your broker needs to recognize that you have created something special and deserve to be compensated at a higher rate,” Warrillow writes.

“EOS and EO changed my life. I used to have an ego, used to be like, ‘Alright, I’m the guy, I’m the CEO.’ Once I educated myself and gained experience, I got smarter and I started hiring smarter people than me.”
– Wes Mathews

Another professional who can offer sound perspective is a financial planner, for whom business succession is always a fair topic. Questions about legal steps should be expected. What have you done? When was the last time you amended it? Do you understand the laws and what’s going to change soon?

“We’re all over it,” says Jeff Fratarcangeli, managing principal of Fratarcangeli Wealth Management in Bloomfield Hills, part of the Wells Fargo Advisors Financial Network. “It’s a conversation in every single review, every referral that comes our way.” The goal, as he says, is to prepare for the worst but plan for the best, in order to avoid being “derailed by an unforeseen event.”

When he was playing soccer at Eastern Michigan University in the early 1990s, Fratarcangeli took up the study of finance. He entered the working world at the time that “old-school pension plans like the one my father had at Ford” were becoming more self-directed, so he’s been delivering financial-planning guidance ever since. Having now seen “just about everything twice,” it’s easy for him to enter an investor’s mind.

“The reality is, we’re going to look at a number of things,” he says. Important criteria include such questions as what business sector the target company is in and whether this company relates to one’s existing personal business. “Are you taking on more concentration in the same risk category?” he asks. Other worthwhile questions concern what the data shows as far as profitability, cash flow, and cash reserves. And, finally, the ownership structure is a consideration.

Whether the eventual result for one’s business is a merger, a transfer within the family, a sale through a management buyout employee stock ownership plan, or an outright acquisition by an outside buyer, the idea is to adhere to a plan but be prepared to make some changes. If everything goes well, the business owner will see the hoped-for payday and gain more freedom. For Matisse, the plan for the next five to 10 years entails staying involved, steering his company along, and retaining some ownership after easing out of day-to-day operations.

“I wanted to continue to work and have the flexibility, and maybe gamble a little bit, on the fact that the company will continue to appreciate,” he says. He has already maneuvered into a position of greater freedom. At the time of a recent phone interview, Matisse and his wife, Marion, were at Detroit Metropolitan Airport, waiting to begin a trip to Greece. “We travel quite a bit now, and really, by building this business, I have the flexibility of working from anywhere in the world,” he said.

The last year and a half have, indeed, been a period of transformation, and Matisse is happy to share his insights. “What I learned through this is to plan ahead 10 years before you think you’re going to retire,” he says. “If you own a business, start making a plan. Get ahold of somebody and have the discussions, and understand if you have a company that fits into one of these models for sale.” 

With the right measures in place when it hits, the Silver Tsunami could just sweep you away to somewhere you’ve always wanted to go. 


Building Value in the Business

In “Built to Sell: Creating a Business That Can Thrive Without You,” author John Warrillow lays out a few steps to be implemented for a business to thrive without the owner’s personal involvement in every detail.

1. Isolate a product or a service with the potential to scale. The text’s example is the Alex Stapleton graphic design agency. He develops a process for creating logos and teaches it to his employees. It offers value to customers, and it’s repeatable and draws return business.

2. Create a positive cash-flow cycle. “To create a positive cash flow cycle, charge your customer in full or in part for your product or service before you pay the costs of whatever it is you provide,” Warrillow writes. With a unique offering, it’s possible to bill up front, and the company’s value increases.

3. Hire a sales team. Being too personally involved in sales is a bad idea and, in case of a business transfer, sets up the owner for continuing to work in a “long and risky earn-out.” Two salespersons are better than one.

4. Stop selling everything else. Once Alex decided to specialize in logo design, he passed up the opportunity of a large new account for generalized graphic-design services. It wasn’t easy to say no, but it paid off.

5. Launch a long-term incentive plan for managers. A solid management team will impress a buyer.

6. Find a broker. Then be prepared to document attributes of the business and its performance. A business plan is part of this process, too.

7. Tell your management team. The news might not be welcome at first, but they should know what’s happening. Tie the success of the deal to their incentives.


The Acquirer’s Perspective

Michael Bassirpour
Courtesy of Matthew Lavere

Michael Bassirpour, 39, is CEO and a partner at GLR Advanced Recycling in Roseville. After starting his career in real estate, Bassirpour sought something more “recession-proof,” and got into recycling. Today, his company handles tens of thousands of scrap cars each year.

“The team developed a unique business model for buying and processing scrap cars in 2015 in Detroit,” he says. Since then, GLR has been scaling up with what Bassirpour calls “a copy-and-paste model, no different than opening up a Little Caesars.” He has found the “extremely antiquated” recycling business to be prime for disruption.

“People don’t really use technology in running their business, and they don’t come up with different ways to do things,” he says. “They just kind of do it the way their grandparents did it. I don’t have grandparents in this business. I started from nothing, from scratch. I’m more of a self-taught kind of person who doesn’t abide by an old generational playbook.”

As GLR integrates technology and new ideas, one value-driver it developed is 1-800 Cars4Cash, a proprietary digital-marketing offshoot for buying scrap cars. “In terms of the opportunity and how far it can go, I have a grandiose vision, and I think it could be scaled throughout the country,” Bassirpour says.

Recently, he solved another problem through standardization. Bassirpour has turned his attention beyond “maxed-out” Michigan. Seeing opportunity for the company’s model on the West Coast, he “went all-in,” moving his family to Los Angeles in September. He already has a new trading office up and running, and is looking at opening two brick-and-mortar recycling operations by the end of 2024.

Acquisitions are a part of the program — one he views as “taking a sad song and making it sweeter.” Finding a good portfolio fit, he says GLR will move aggressively, yet sensitively, to make a deal. “I really try to make it a win-win situation, where if the person that’s selling doesn’t have a good succession plan — they’re tired and ready to exit the business — I try to make it where they’re happy, and we try to take care of them and their families.” 


 

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