Succession Planning: Who is Going to Take Over?

Every owner gets to a certain point when they ask: how much longer do I want to do this? Does this work and responsibility excite me anymore? Many times, we encourage an owner to begin considering their future in their late 50s. Because succession can take between three to five years, it seems to be an ideal time to weigh your options.

During your late 50s, you begin to think about the twilight of your working years. Many Baby Boomers are prepared to retire and may want to get out of the business once they have the opportunity. We’ve worked on dozens of transactions in the last few years and know how to help you through the process.

If succession planning is the right move for you, you need to ask yourself four important questions:

1. Are there family members who want to come into the dealership?
2. Is there a key person inside the dealership you might want to sell to?
3. Will you sell to a third party?
4. Or do you want to do an ESOP? (Employee Stock Ownership Plan)

Let’s walk through the options.

Family members

Family members need time to train and do apprentice work if they are interested. A family member unfamiliar with the industry can receive training both by working in the store and through formal dealer schooling.

Selling to a key individual within the dealership

If there’s a general manager or another key individual to whom you might want to sell the dealership, you need to have a conversation with them. There is sometimes a transition of “ownership thinking” instead of “employee thinking.” They may need additional training in all facets of the dealership. Our team can help the Dealer look at the economics and help structure the deal. Also, to make it worthwhile for someone who hasn’t always envisioned themselves as an owner, you could stage their purchase—25% to start and more later. A sale isn’t always a light switch, and that’s another reason you want to give the process some time.

Selling to a third party

You may also want to sell to a competitor or someone already in the business. This sale to a third party, by far, in our experience, is the quickest. You need to be ready for your legacy to wind down and for another store owner to take it over. Our advisors can help you find that third-party buyer that makes sense for you.

ESOP (Employee Stock Ownership Plan)

The Employee Stock Ownership Plan is a great option—and can benefit loyal, longtime employees who can become owners. They built the dealership, and now they’ll benefit from all that hard work. There are also excellent tax advantages for you as the seller:

• Potentially deferring the gain on the sale of the dealership
• The dealership becomes a non-taxable entity where you don’t have to pay taxes any more on the store’s profits.
• The legacy developed stays intact and the dealership, you, and your employee’s impact lives on

This option also provides your employees an opportunity to build some wealth. In one example we experienced, sales consultants were retiring with $6-7 million in their ESOP account in addition to their other retirement accounts. An ESOP is very similar to a 401k in that it typically pays out over a period of time.

Once you choose the right option, you must spend years preparing some housekeeping within your corporate entity. And it would be best if you were prepared with an alternative option, there’s always a chance your first decision may not work out. In one situation, we experienced an individual who went to school to learn the ins and outs of a dealership only to realize it was no longer his career path. Having an alternative option can lessen the impact of such a sudden change.

You can identify the right option for your dealership with the help of one of our advisors. Having a conversation is the most important thing you can do, and we’re here for you to talk through it all.