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Retail consultant Jeff Morrow is concerned about the future of art supply stores. Why? Because so many owners of AM stores are nearing retirement and so few have plans for what will become of their businesses once they retire. “It’s important that brick-and-mortar stores stay alive,” said Jeff during a presentation at the National Art Materials Trade Association (NAMTA) show held in April. “The government isn’t investing money in the arts, so it’s up to retailers to help keep art alive, but to do that we have to plan.”

Succession planning was the topic of Jeff’s seminar, and according to NAMTA, it’s something that their members are interested in learning more about. Jeff spent months researching, and told his audience that the number-one thing he learned about succession planning was this: Start early. In fact, five to 10 years is how much time you’ll need to prepare for a smooth and, hopefully, profitable transition.

According to Jeff, there are over 21 million businesses in the United States, and 90 percent of them are family owned. Of those 90 percent, less than 25 percent have a succession plan, and only half of those have formalized it in writing. “In the fine art industry, it’s much less than that!” he added.

Excuses and options

So why aren’t retailers making plans for leaving their businesses? Jeff says he’s heard many reasons for putting off this important process. “I don’t have time.” “I don’t understand what I need to do.” “I’m too young to worry about that.” “I’m too busy to bother.” “I don’t have a successor.” All are common excuses for putting off the inevitable.

Unfortunately, if you don’t give succession a second thought, when you do leave your business, what happens to it may be less up to you and more up to whatever the market dictates at the time. “Succession planning is about taking control,” stated Jeff.

As for the options, here are the choices Jeff laid out for the attendees of his seminar.
• Do nothing. Allow the market to settle it when the time comes.
• Sell it to an employee. Do you have an eye for hiring entrepreneurs?
• Pass it to a family member. Most owners of family businesses do this.
• Find an outside buyer. Sell it yourself or through a broker.
• Liquidate the business. Someone will buy your business for pennies on the dollar.

Keeping it in the family

Believe it or not, Jeff advises that you decide thinking about your family succession plan when you open your business. “Develop a timeline and commit to it,” he said. Once you know when you’ll retire, the next thing to do is to recognize who wants to take over the business; parents should never force a family business on a child who doesn’t want to run it. If there is more than one family member interested in running the business, pick one to be the leader and place the others in management roles. It is important to clearly identify roles and responsibilities of those who will take over. Remember, the leader may not necessarily be the oldest child.

Once you make the decision of who will succeed you, then the grooming process can begin. Five years is a good amount of time to groom someone; two months is not nearly enough.

Your succession plan should be kept as transparent as possible with your successors and employees aware of what will happen once you’re gone. “To get people ready for a change, you have to start talking about it to get them used to it. Then don’t make any secret ‘unofficial’ verbal amendments to the plan,” he noted.

Jeff warns retailers who are thinking of leaving their businesses to their children to counsel with a strong financial advisor as there may be heavy gift taxes to pay. “The government allows you to give $10,000 per year to each child without incurring taxes,” he added. “Only 30 percent of family businesses continue into the second generation and only 15 percent are passed to the third generation, all because of poor planning.”

Getting ready to sell

Of course, you don’t have to give your business away; you could sell it to a family member, an employee or an outside buyer. If you want to sell your business to an employee, look for more than one suitable candidate among your staff. The reason for this is that you want competition. “Let the bidding begin!” exclaimed Jeff. Planning early for a sale to an employee helps avoid panic among your staff, and it gives you time to prepare your employees to move up.

Before you begin the process of selling your business, gather a team of advisors. These should include an accountant, an attorney, a banker, a financial planner, an insurance agent and a trusted business colleague in another industry.

Before you can sell, you must understand what your business is worth. “Most people think the value of a business is equal to two or three times its annual sales, but that’s wrong,” explained Jeff. “You must understand EBITDA, which stands for earnings before interest, taxes, depreciation and amortization.”

While Jeff recommends getting a professional to appraise your business, he suggests taking precautions before entering into an agreement with a broker too quickly. “Ask questions about his background. Ask for referrals. Ask if you can talk to the owner of the brokerage. Ask the broker to show you his success rate. Find out how he will market your business. Get the rates. See if the broker belongs to a trade association.

“Be suspicious of brokers who have no website, aren’t licensed to sell in your state, have no printed marketing materials, can’t explain business valuation, tell you it will be easy to get your asking price, or ask for a total fee upfront. Also, watch out for someone who asks you to sign something that commits you to stay with the brokerage for a specified amount of time. If you are in such a contract, the broker may get a commission even if you sell the business yourself.”

If you’re unsure of whom to hire to valuate your business, Jeff recommends starting with referrals from your accountant, or call the Better Business Bureau. Be sure to look for someone who specializes in retail businesses.

Mistakes to avoid

There are an unlimited number of mistakes people make when selling their businesses. Here are some of the most common.
• You didn’t know the value of your business.
• You didn’t know the difference between the value and the price.
• You didn’t negotiate with multiple buyers.
• You didn’t sell at the right time. (The market’s time may not be your time.)
• You didn’t provide the buyer with proper documentation to increase the price (for example, proof that a new art college or art center was opening in your area).

Materials to have

As for documentation, there are certain things a buyer will want to see. Even if the buyer doesn’t ask, providing the following may help you get the price you want.

• Executive summary – Describe what the business is, including the strengths of the company.
• Basis for value – Costs for the new owner, such as new fixtures, will reduce the value of the business, so take this into consideration.
• Organization chart – This will help the buyer further understand your business.
• Market research – A buyer is looking for potential. If you can name an emerging market, even better.
• Financial history and financial forecast – Be open with the numbers.

Bottom line: Start planning your exit strategy now. To light a fire under retailers, Jeff poses this question: “Here’s a scary thought. What would happen to your business if you couldn’t function today?” With that in mind, begin the process by asking others how they went about selling their businesses or passing them on to family members. Learning from their good and bad experiences will give you a head start on planning your own.

For more information about Jeff Morrow or to view his Power Point presentation from this seminar, go to www.TheRetailWay.com or call 949-233-4443.