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Exit Strategies: The Good, The Bad, and the Timely
EXIT STRATEGIES The Good, The Bad, and the Timely
By /Jordan Whitehouse
Joe Isom and his business partner were in their mid-50s when they started thinking about their exit from California Sheet Metal. They weren’t ready to leave yet, but they knew the clock was ticking to make a plan that would secure their futures and that of their company. “We saw from our own research and talking to other people that it can take some time to make a transition or to sell your business,” Isom says.
They were right. After talking to more people and exploring a third-party purchase, they finally landed on an employee stock ownership plan (ESOP) in 2013. This essentially means that they sold the company to all of California Sheet Metal’s employees, including union members. It’s turned out to be the best option for them, but every company is different.
In 2013, California Sheet Metal implemented an employee stock ownership plan (ESOP, which essentially means the owners at that time sold the company their employees, including union members.
Photo courtesy of California Sheet Metal.
The most important thing is to have a plan, says John Ovrom, the president of transition advising company Exit Consulting Group. Ovrom also helped Isom and his partner devise their succession plan. “It doesn’t mean you have to execute the plan, but if your goal is to some day leave the company without it being reliant on you to be successful, then the longer you plan it, the better it is.”
Few companies appear to be heeding that advice, however. According to a study from Deloitte, only about 10% of American companies say they have a management succession plan that is effective in transitioning young leaders into senior roles. With about 10,000 baby boomers retiring each day until 2027, that could spell disaster for the future of these companies and their retirement coffers.
So, where does one even start the planning process? The place to start is to define “the win,” says Ovrom. Reasons for leaving typically fall into four categories, he says—emotional, financial, risk reduction, and health—and each reason coincides with a different exit strategy.
“If risk tolerance is big, for instance, then you can’t sell to an inside buyer because they likely won’t pay you quickly,” Ovrom says. “So that means we have to take it to a third-party sale, which will allow you to get out faster.”
All options have their pluses and minuses, though. A thirdparty sale might get an owner out quicker, but the value of the company might not be as high as anticipated, particularly if little thought has been given to who and how the owner’s shoes get filled.
For Al Youna, president of YMI Group, a third-party sale wasn’t right for him. “A few years ago, I decided I didn’t want my retirement to be contingent on the sale of my company,” Youna says. “Instead, I worked with a financial planner to develop a 20-year plan. Once I reach that time, I could basically decide to walk away from the business, and I’d be able to live the same lifestyle.”
If legacy and trust are big issues for an exiting owner, another option is to hand the reigns over to a family member. But that person has to be trained and ready to take on those leadership responsibilities, Ovrom says. “The best transition I’ve worked on is the one in which the son or daughter is in the business, started at the bottom, and moved up. This is particularly true in construction. The guys in construction are a pretty tough crowd; you’re not going to walk in and gain their respect just because you have the same last name.”
And then there’s the ESOP route. Virtually unheard of until the mid-1970s, there are now over 6,500 of these plans in the United States, covering 14.4 million people, according to the National Center for Employee Ownership. There are different versions of ESOPs, but in essence, they allow employees to purchase the company from previous owners and receive shares themselves.
Ovrom’s advice is to only do an ESOP when the business legacy is the primary motivator. ESOPs that succeed are the ones in which owners recognize they’ve been successful and wish to empower wealth onto the workforce, he says. “Owners can then decide that over 10 years, they are going to work their way out of a job and coach the workforce so they can gain the wealth.”
This was exactly the case for California Sheet Metal. “Because we’re a 101-year-old company, multiple generations of workers that have worked here have become owners,” Isom says. “So we wanted the legacy to continue, and sometimes with third-party or corporate purchase they’ll break up the company. We didn’t want that to happen.”
They also decided to include members from Local 206 in the ESOP. It was a straightforward process to do so, and Isom says they’re glad they did because they’ve always felt that a lot of the strength and success of the company comes from those members.
Local 206’s Business Manager Doug Tracy says it has been a win-win for everyone. “When guys know that it’s partly their company and they have a vested interest, I think the level of effort and quality go up,” Tracy says. “[ESOPs] are also a huge benefit to the relationship between the union and the contractor. Animosity is all but eliminated because everybody’s on the same boat.”
No matter the exit plan, however, the key is to give yourself lots of time to get one in place, Ovrom says.
Isom’s final piece of advice is to hire the right person to help with succession planning. “Don’t do it yourself,” he says. “Don’t try to do all of the process or the evaluation, because you have to run your business. These people are professionals. It might seem expensive, but in the end it’ll pay off.” ▪
Course instructor and ITI field representative Aldo Zambetti.
Photo courtesy of Partners in Progress.
ITI’S BUSINESS DEVELOPMENT COURSE
Most experts agree that the earlier a business owner can start thinking about a succession plan, the better. That thinking could begin even before they become owners, and the International Training Institute’s (ITI) business development course allows them to do just that.
Launched about two years ago, the three-phase course helps union sheet metal workers prepare themselves for becoming union sheet metal contractors and, if they wish, for exiting on firm footing.
“The mantra from class one to the end is: You’re not a failure if you don’t go into business. You’re only a failure if you go into business with your eyes wide shut,” says course instructor and ITI field representative Aldo Zambetti.
Phase one of the course involves eight weeks of distance learning that touches on everything from conducting market research and evaluating the personal risks and rewards of going into business to building bids. Phase two is a week-long session at Local 33 near Cleveland where students learn about creating an actionable financial plan, ethics and sales, and devising human resources policy. Phase three is self-directed, allowing students to use the Small Business Association website to follow a stepby-step business plan template at their own pace.
Throughout the program, and after it ends, students can get additional assistance, including guidance on how to think about a succession plan tailored to their specific goals and situation from SMART Capital Director Rob Biederman.
That kind of specificity is one of the biggest advantages of taking this business development course over others, Zambetti says. “There are classes out there that have highly educated people leading them, but they don’t know the ins and outs of our trade. They don’t understand organized labor construction versus unorganized. We do.”
For more information about this free, anonymous course for SMART members, head to sheetmetal-iti.org/businessdevelopment.
