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More thoughts on Succession Planning

Lucas Deal May 21, 2014

This is Part II of Successful Dealer’s two-part discussion with KEA Advisors and CliftonLarsonAllen on dealer succession planning. For Part I, CLICK HERE.

How should a successor be trained to take over a business?

KE: “In addition to business and financial training, I also think it helps when [a successor] spends some time watching a dealer and seeing what he/she does every day. I think that’s something we see a lot with dealers who have been really successful with their businesses and want to ensure the business is in good hands when they turn it over. They want to make sure their [successor] knows that ‘this is what I do all day’ training. It kind of rounds out the candidate.”

SS: “There’s definitely a benefit to having a successor see how the dealer has led the business, and watch how he interacts with his managers and employees on a daily basis. But I also think, especially during a succession to a younger generation or a third party, that you want to encourage some innovation, too.

“You want the successor to be willing to change the environment around them … just because they see how the dealer led the business doesn’t mean they have to do things exactly the same.”

How does a successor build relationships with his new management team?

SG: “As the next generation slowly steps into the shoes of the dealer he should be acquainted with the dealer’s internal and external network — so managers, but also the dealer’s attorney, his accountant, his outside marketing firm if he has one. The successor should be building all of those relationships at the same time.

“After that the most painful part of the whole process is the successor must be allowed to make decisions, and mistakes. Successors will make decisions a dealer principal won’t agree with, but if the principal wants them to succeed he has to let those decisions stand. When they don’t, they undermine the confidence and authority of the successor.”

KE: “You have to allow them to fail. Both before they take over and when they are in charge. If [a dealer] is trying to establish the credibility of his successor, he has to be willing to let things go, and stand behind [the successor’s] decisions.

“If a manager circumvents a successor because he doesn’t agree with his instruction and the [exiting] dealer principal allows that, that’s when the transition starts to fall apart.”

When should a dealer principal and his successor discuss the financial aspect of the takeover?

SG: “As a dealer’s net worth grows that conversation should happen gradually, with the next generation becoming increasingly aware of what it will cost to transition into that leadership role.

“We have some customers in their 40s who are moving assets into trusts to benefit their children down the road, and help put them in position for taking over if that’s what they end up wanting to do.”

KE: “I think there has to be acknowledgment by the successor pretty early on that this [dealership] is not a gift … They are going to have to buy this business.

“I’ve had some conversations with sons who will say ‘I don’t understand why I have to buy the business. I’m not going to have any money to live on.’ That somewhat shocks me. They don’t realize the business isn’t being handed to them. If they want to lead they have to purchase it. And while that may not be comfortable, if they really want to own this entity that’s the step they have to take.”

SS: “Those financial conversations have to happen with your estate planning. If the dealership is a family business with multiple siblings some may be left on the outside so it’s important that they all understand the decision dad is making … You want to make sure you put the right assets in the position of the right people at the right time.

“And when a child is succeeding a father in a business they should do so not only operationally but also with ownership of the business. If you don’t then dad’s ownership is going to be hanging over everyone’s head.”

What aspect of succession planning are dealers good at, and where do they typically struggle?

KE: “I think from the transactional side most are pretty good at it. They’ve run a business for decades so they know the steps they need to take in order to sell it and pass it on.

“But sometimes they may not understand they need to retire. Some of these guys do think they will work forever, and it can be hard for them to process letting go.”

SG: “I think they can pretty quickly gauge if someone can run the store — except with family members. Sometimes with kids their opinions can get a little clouded. But overall I think most dealers are pretty good at measuring and understanding people.”

SS: “I’d say an area [dealers] struggle with is their personal attachment to the business. There’s a pride thing when it’s your blood, sweat and tears that made the business — it’s their name on the sign — and it’s hard for them to look at exiting from that and giving up all control.

How can a dealer principal’s personality and work ethic impact a succession plan?

SG: “A lot of these older dealers today are strong Type A personalities, where their sons are usually a little more reserved and laid back. That can cause an issue if the father decides he wants the son to take over because it can be hard for that second generation to step into dad’s shoes.

“One thing we try to tell our dealer clients is ‘If you get hit by a bus tomorrow, do you want your next generation to succeed or fail?’ We try to let them know that if they want Junior to succeed, they have to be willing to rein in some of that dominance and let Junior make some decisions.”

SS: “If a successor is such a weak personality that the dealer basically tells them they are going to be in charge and what they’ll need to do, the succession plan isn’t going to work.”

KE: “I also think the entrepreneurial personality tends to be pretty protective of their kid. They’ve worked really hard to provide a life and opportunity for that child, and they don’t want to see them fail … But that means sometimes they will rush in to save the kid, and the business, at the first sign of trouble. That can be counterproductive.”

How does a dealer principal let go of his business?

SS: “My advice is to move away and be as far removed from the business as possible. It limits the ability to stop by and check in. We see a lot of dealers who have retired but still live in town and come by the store every few days. They might even still have a desk.

“Looking over their shoulder like that, that doesn’t help the successor.”

KE: “I think they have to hear that message more than once. They have to be told they are done. It helps to have an advisor who can be objective and remind them that it’s time.”

SG: “We have the benefit of being able to work with a lot of different dealers so we see a lot of successes and failures with succession plans. I think one trait that’s found in a lot of successful transitions is a willingness to listen. Dealer principals who listen to advice from their management team, or OEM, or us, are usually more likely to pick the best person for their job and walk away.”

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