Furniture industry business owners should start thinking about how they’re going to transition their business to new ownership even when that change isn’t imminent
There are many moving parts when it comes to running an independent business, and while most business owners tend to the urgent matters first, some may be forgetting an important and inevitable event coming up in the future: transition.
This is a problem Ahmie Baum, CEO and founder of Interchange Capital Partners, says he sees often with his business clients. Baum has been in the financial services industry for over 40 years, previously working at UBS for over two decades.
“Every business will eventually transition to new ownership— whether it’s a third party, an employee or group of employees, or most commonly to another family member,” he says. “But one of the biggest issues I see with family-owned businesses is this notion that they’re so busy running their businesses that they’re not recognizing that there is an inevitable transition that’s going to happen.”
Baum says this big blind spot can be caused by a few things, including thoughts like “I’m not planning to retire anytime soon,” and the fact that transitions and the accompanying work that needs to be done is uncomfortable and complex for many business owners.
“When they’re running a business when do they have time to do the rest of the stuff?” Baum questions. “In many cases, they don’t, and it requires a multidisciplinary approach, expertise in tax, legal, employee protection, benefits, etc.”
And what Baum wants business owners to understand is that managing your business for transition is” just good business.” If you’re constantly managing your business for the inevitable liquidity event, you’ll have a better and stronger business, according to Baum.
He offers three phases to prepare for transition that you should always be working on:
- Identify and Quantify. Baum says to make sure you’re clear around what it is that you want. The question is, five years from today, what has to happen so that you’re happy with your progress?
“Many people don’t take the time to do this part, and it’s really important,” Baum adds. “They don’t make it clear what they want to accomplish down the road for their business; many don’t have a business plan.
Baum says developing a business plan is a great way to identify what you want for the future, and for furniture retailers this could be anything from revenue growth to store expansion to adding more employees or new positions.
Then Baum says people need to quantify if there’s a gap between what their financial statements look like from a business and a personal standpoint. “Once you have a business, your wealth creates another business around that, and that creates an interchange between the two that businesses need to focus on,” he adds.
- Maximize and Protect. “First look at all the areas of business and family that you can add value to, create more value from,” Baum says “And the protection in case something goes wrong. How can we reduce danger? Independent businesses have a lot of areas where you have Achilles heels.”
When maximizing, think about how you can reduce your taxes or increase the value of your business by fixing up your building or remodeling your sales floor.
And when it comes to protection, Baum says to look at all parts of your business, from logistics to customer service. “Most businesses don’t have employee handbooks until someone either gets hurt or has an issue that needs to be resolved,” he says.
- Transfer and Transition. After the first two phases are put into practice, Baum says you can begin to think about the actual transition. Most transitions happen internally, either to a family member or key employee or employee group, according to Baum, but the next in line needs to be part of the whole business continuity planning before the transition happens.
That means if you’re passing your business down to one of your children, they need to be involved in every process that goes on in the whole business so they can know everything that goes one.
“Even if you aren’t intending to sell it immediately, you never know when you’ll be hit by a proverbial bus or when your top salesperson will get hurt,” Baum says.
“You need to have an action plan for transition no matter what,” Baum explains. “There’s a recipe for doing this, and the upside of preparing is you’ll have a stronger business from day one, even if you’re still in it 20 years from now. Versus not spending the time and energy and building this system that helps navigate this complexity.”