Running a Shop How to Lead Leadership Finance

Transitioning Ownership

Order Reprints
Transitioning-Ownership.jpg

If Tommy Chandler Jr. has learned anything from his father, it’s that 20 years in the auto care business will burn you out.

And Chandler watched it all happen—from sweeping the floors when the shop opened in 1985 to when he officially took over ownership in 2006. Chandler grew up in his father’s business, learned how it ran and functioned within, and witnessed all the hardships that eventually drove his father out.

“I’ve watched three shop owners now that started dragging their businesses down because they stayed in the game too long,” Chandler says. “I don’t want to be that guy. About 20 years is about all you’re going to be able to handle in this business.”

It wasn’t that his father wasn’t motivated or didn’t work hard; split between running Professional Automotive in Greenwood, S.C., and serving as a fulltime instructor at a local career center, Chandler’s father simply couldn’t put in the time it would take to allow the business to grow.

Because of that, Chandler, who had served as the shop’s service writer for years, stepped in to take over the family business. And with that succession came a five-year business purchase agreement,
training on handling the shop’s finances, changes in leadership styles, and some firing and hiring.

Chandler says he’s learned a lesson from watching those three different owners burn out after 20 years—he plans to retire from the business in 10 years. And with plans to run a parts store full time after
that, his first succession experience is serving as a lesson on how to improve the succession plan he’s currently working on with his general manager for running all three of his shops.

IDENTIFY THE RIGHT SUCCESSOR

When the shop transitioned to Chandler, it was easy: He was an only child and primed to take over the family business.

But because his children are not part of the auto business, Chandler has looked to his general manager—the same age as Chandler—to take over within 10 years. By the time Chander reaches his 20th year in the business—his threshold for “burning out”—he hopes his successor will breathe new life into the business.

John Walcher, a mergers and acquisition expert at Veritas Advisors, says it’s important to find someone who understands where the business is going and not where it came from. If the seller wants the business to grow and thrive, whether that’s through additional relationships or locations, he or she must look for the right type of personality—and that person might need to be a risk taker.

“Someone who can see the future of mechanical repair, someone who’s hard working and someone who doesn’t necessarily have the risk tolerance of an entry, but has the ability to thrive in current situation and can grow from there,” Walcher says.

Chandler says he chose his future successor based on a combination of experience and drive—his general manager ran a couple of shops in the Atlanta area, and he carries the youthful ambition that Chandler channels to grow the shop.

“He comes with that type of multi-shop experience,” Chandler says. “It was to the point where I had to enter into a deal with him or he was going to move on. I identified him as having the potential to do it, and the desire to do it.

“I’m only 32. I’m still very young. At the same time, the right guy is only going to come along maybe once, maybe twice. I want to keep and hold on to him.”

UNDERSTAND THE BUSINESS

For Chandler, growing up in the business greatly aided his ability to take over managerial duties seamlessly. When it came to understanding the shop’s inspection process, for example, his experience made the transition that much easier.

“I was sweeping floors when I was 8 years old,” Chandler says. “I grew up doing 10 oil changes a day. I got to the point where I could memorize the inspection.”

Chandler’s transition was aided by attending the same Bot tom-Line Impact Group meetings his father attended through industry consulting firm RLO training.

“That was part of the deal, that I needed to stay in that group to help me learn the business and managing side of things,” Chander says. “I had a great support staff.”

But Chandler understands that not all shops going through a succession have the benefit of such a storied parent-child business relationship—that’s why he spends every day having conversations with his general manager, going through scenarios and asking for new ideas, all in preparation for when the manager takes over within the next 10 years.

“He goes with me to all the Bottom-Line group meetings,” Chandler says. “He sees the numbers. We meet once a day to talk about things going on. If there’s an issue we sit down and talk about it. He knows how to handle it from here on out. As we go through it, hopefully the less and less questions he’ll have for me.”

DETERMINE THE BUSINESS VALUE

Walcher says the value of a business is the price that a willing buyer would pay to a willing seller.

“Sellers think they should be compensated for 30 to 40 years of sweat equity,” he says. “A lot of times, buyers can’t derive value from that, or how much the seller thinks it’s worth.”

Determining that value involves two different approaches:

• First, follow public info and drive a relative value based on that information.

• Second, have a trusted advisor do a valuation of the business—someone that not only understands the seller and their business, but also the industry.

“The only real way to know what the business is worth is to let the market figure it out, and the best way to let the market figure it out is to have multiple people set that price,” he says.

Chandler says choosing his own successor within the company has ensured an easier transition and allows him to get the most return on his investment. He is currently working with a lawyer and an accountant to determine a seamless way of selling the business.

“You get the most amount of money when you sell it to an employee within a business,” Chandler says. “The employee knows how the shoptics, sees the value that’s there, the hidden potential. Plus, they’re easier to work with and negotiate with. Outside parties just look at numbers.”

MAKE A PAYMENT PLAN

At Professional Automotive, the switching of ownership took place before Chandler had officially bought out his father.

Through an agreement reached with the shop’s accountant, over the course of five years, between January 2006 and December 2010, Chandler took over running the shop while his father collected
monthly payments that came straight from the shop’s profits.

Having that timeline helped put Chandler at ease and gave him a sense of ownership when he officially took over.

“In January of 2011, I knew I would be the official owner,” Chandler says. “That gives me a plan, that gives me a future, something to work towards.”

When a seller agrees to a payment plan of some kind, Walcher says it’s important for the seller to consider the buyer’s ability to make that payment from the cash flow of the business.

“The seller wants to receive as much as possible in cash and not in a note,” he says. “But sometimes it’s in their best interest to take a note for the purchase price because you can defer taxes. It also allows the seller to yield a higher return on that note than if you took it all up front and put it in the bank or the U.S. Treasury or something low risk.”

However, Walcher says it’s important to be prudent and have a reasonable expectation that the business itself can support the debt that arises from the transaction.

“You don’t want the buyer to put more and more money into the company over time to meet all its cash flow needs,” he says.

DRAFT A CONTRACT

Regardless of the transition being between family members or co-workers, Chandler says the biggest lesson he learned from his own takeover was how important it is to have a written contract that details the timeline with exact dates for the official succession. Because of their relationship, Chandler was satisfied with a verbal contract at the time.

“At any point, he or I could have backed out,” Chandler says. “When I started taking over the business, a good year was around $500,000. By the end of 2010, we did $1.1 million. And he said it several times: ‘If I had known it would be like this, I wouldn’t have sold it.’”

Walcher says there are four key things to remember when drafting a contract:

• If the seller is loaning some of the money to the buyer for the purchase, then a lot more documentation needs to happen and that goes beyond the promissory note. This might include some other documents and contracts that provide the seller additional security when loaning.

• If the seller is going to sell business but retain and lease property, then it’s important and sometimes mandatory to have an adequate, written agreement between property owner and buyer.

• For family succession plans, there’s an added level of trust involved, and Walcher says this causes people to avoid putting legal documentation together. But there should always be a more
formal agreement of transfer that outlines what circumstances the buyer or seller would be able to sue each other if the deal is breached.

• Be sure to include any documentation that might be useful in preserving the tax planning of the seller. For family members, the seller typically wants to minimize the value of the business if there
will be a tax impact at the transfer; if there isn’t a tax impact because the estate is large enough, it’s more likely the seller will want to maximize the value so that when the daughter or son eventually exits, they will have a higher basis to minimize their taxes down the road.

TRAIN ON THE FINANCIALS

While Chandler was very knowledgeable of the shop’s inspection process, he was very ignorant of the company’s financials. To remedy this, he spent months with his father, learning to do payroll and how to use QuickBooks.

“It really is an easy process,” Chandler says. “I watched him do it for a week, then he watched me do it for a week, and then I did it on my own for a week. Eventually it just became another thing to do.”

Looking back, the true takeaway of this tutorial and the most important lesson to teach to Chandler’s own successor is that simply knowing how to handle the financial side isn’t enough—learning to adapt is key.

“It’s important to keep an open mindset,” Chandler says. “Just because this is the way one person does things, doesn’t mean exactly it’s the way it should always happen. If your model is to grow, you may outgrow some of the things you originally learned.”

As Chandler’s business grew from four employees to 20 and from one facility to three, much of the training from his father became inefficient and impractical for overseeing several locations. Because of it, Chandler says it’s important to keep the potential future trends of the business in mind when training.

“Take something as easy as managing a credit card,” Chandler says. “When you’re there and you’re part of the business and you have to purchase something, you did it yourself with a credit card. Well,
now I’ve got three locations, and obviously I can’t be in three places at one time. So how do you control that? How do you control the spending? Control overtime and payroll?”

ESTABLISH YOUR LEADERSHIP STYLE

Another advantage of working at his father’s shop for so many years was understanding his father’s leadership style—and how Chandler could improve upon it.

One of Chandler’s biggest challenges was taking over a staff that had grown accustomed to his father’s brand of leadership.

“It depends upon the personalities involved,” Chandler says. My dad was an extremely hard worker. He managed by his actions. If somebody wasn’t pulling their weight, he thought he should work harder and show them how they should be working. If somebody is not working hard, I need to have a conversation with them and find out why.”

What Chandler ended up doing during his initial takeover was firing some of the stubborn employees who would fight him on newly implemented changes and then hiring newer, younger workers that believed in growing the business to more locations.

The lessons he learned from his father during this process were the importance of restraint and allowing the successor to try new ideas—even if it means failing. It’s that level of trust that Chandler believes will empower his own successor and allow the business to flourish once he leaves.

“My dad came in and built it to a certain level—I felt confident he can take it do a different level,” Chandler says. “ [My general manager] definitely has a desire to grow. He believes in our current model, but if he’s got an idea, we normally go with it and see how it works. He may outgrow some of our processes, but that’s a good thing.”

Related Articles

How I Work: Danny Brewer

Improving Managerial Leadership

The Art of Organizing

You must login or register in order to post a comment.