Greg Mably

Historically, deciding who takes over the family business has always been a tough call.

Queen Elizabeth I famously held off naming an heir to her throne for nearly her entire rule. With no children of her own, she needed to pass her crown to a family member.

It’s a similar situation for family pool businesses where owners don’t always have a child who is willing or able to step into the company.

In those cases, it’s important to recognize and acknowledge that reality early.

The options

For a family business without a family member waiting in the wings to run it, the options are limited: an owner can sell or close the business. When a person’s worked tirelessly to build a company, most don’t want to see the doors shut. One solution is to sell to a trusted, long-time employee.

Another is to sell to a group of them.

Sometimes, the owner wants to turn the keys over to all employees in the form of an Employee Stock Ownership Plan. The company can become a private corporation and employees can buy stock in it.

In most of these scenarios, not much changes in terms of customer experience, and consumers continue to have their needs fulfilled with no interruption.

But moving from private ownership to a form of employee ownership requires thought and planning, says Scot Hunsaker, who bought St. Louis-based Counsilman-Hunsaker from his father and sold it to a group of the company’s employees. While the ownership transition had been in place, the employee group approached Hunsaker about buying his stake sooner than expected. Within 45 days, the new owners had negotiated an agreement to buy Hunsaker’s remaining stock.

“You can’t put an ownership deal together in 45 days if you haven’t laid [a] strong foundation,” says Hunsaker, managing partner of St. Louis-based Ardent Group, which he founded to help business owners with successions.

Transitional plans are instrumental in accomplishing that, no matter what route an owner takes.

“Even if your succession plan is locking the door, you still have to be thoughtful about planning for that so it can be done smoothly, so it doesn’t put you and your family at risk for a crash,” Hunsaker says.

Readying the new leader

Top-down leadership doesn’t work when planning for a succession. To give the business the best chance for success and longevity, an owner has to develop the leadership that the business needs after his or her departure. That means that training takes on an increased role in the day-to-day operations to be able transfer the needed expertise that’s at the heart of the business to the new owner.

“The problem today in the pool and spa industry is that we don’t make very many widgets,” Hunsaker says. “Most of the people in the industry are selling knowledge. For example, in your supplier world, they’re providing a product, but it’s not just a product, it’s how to use that product and how to educate the user about that product.”

Whoever’s going to take over the business should be in all key business meetings, learning essential procedures, and not just thrust into the management position.

During the transition at Counsilman-Hunsaker, the employees who would be assuming ownership took more and more active roles in the daily management of the business.

“When I bought the company in 1999, I realized that if I wanted to grow, I was going to have to make significant changes,” Hunsaker says. “As the son, there was no way I was going to work harder than my father. My father was working seven days a week, 15 hours a day.”

The solution was to infuse the business with institutional knowledge. When he bought the company, Hunsaker put a “shared fate” plan into place so that the success of all employees and the business itself were tied together, and added a management team and professional tools to track progress.

The transition to new ownership also doesn’t have to — or need to — end when the ink’s dry on the contract. Building a business is a labor of love and it’s not uncommon for founding owners to remain engaged in some role — on the board of trustees, in a consulting role or even as a staff member with some extra expertise.

Those relationships, though, take open dialogue and well-communicated expectations on both sides. After the sale of Counsilman-Hunsaker closed, Hunsaker stayed on for a few months to help make the transition a smooth one.

“It did come together very, very quickly,” he adds. “So this wasn’t 45 days and I walked out the door never to be seen again. I’m still in touch with them very often. … That was one of the definitions, for me, of success — continuing to have a long [relationship].”

Taking stock

Owners who don’t have a set employee or group to assume ownership still can turn ownership over to their workers.

Employee Stock Ownership Plans allow the owner to sell shares of the company to an employee benefit plan, and stock in the company is treated like a trust, with the stock given to employees after criteria is met. Much like a retirement account, employees become vested in the plan. When they leave the firm, the amount can be rolled into an IRA.

Every year, the Employee Ownership Foundation conducts its Annual Economic Performance Survey, asking ESOP companies about viability and growth.

For the past 14 years, more than 85 percent of respondents have noted that creating the ESOP was “a good business decision that has helped the company.” In the 2014 survey, released this summer, 80 percent of respondents said that outside, independent valuations shows the company’s stock value increased.

“As we’ve said before, research proves that ESOPs, and companies with other forms of broad-based employee ownership, provide more sustainable employment for U.S. workers,” says J. Michael Keeling, president of the Washington, D.C.-based Employee Ownership Foundation.

But ESOPs have strict guidelines, and that model isn’t for every business. That was the case for Aqua Blue Aquatech Pools & Spas based in Melbourne, Fla. The building firm was founded by Bob and Althea Underwood in 1969. In 1985, the second generation wanted ownership — with key employees, said Albert Underwood, CEO and one of the founders’ five sons.

They considered an ESOP, but the option wasn’t quite right for the business. The Underwoods’ attorney suggested a private corporation, complete with bylaws that would outline that shareholders had to sell their stock back to the corporation if they left the business.

“The employees that did come in were rewarded all the years they were owners of the corporation,” Underwood says. “They were rewarded because those were all good years; those were pre-recession years. … Then when they exited the corporation, and sold back their ownership, they were rewarded well. It was a good situation for those employees, and it was good for the corporation.”

Underwood, his brothers and eight employees purchased Aqua Blue, with the family members having a controlling stake. The corporate model means the firm has a board of directors. During the time of employee-owners, Underwood sat on the board and, each year, the company had an election to determine which other owners would sit on the board. It met quarterly, and the firm had a yearly stockholders meeting, where Underwood — who also was CEO at that time — would deliver an update about the business.

“Any major decision, we got everybody’s feedback on it,” Underwood says. “I think it was a healthy way to make decisions and move forward because you had more people involved in it.”

Now, Underwood and his son, Dustin, are the only stockholders in the corporation. Even though Underwood’s brothers opted to sell their stock back to the corporation, they’re still involved in the family business. Calvin Underwood sits on the board of directors with Albert, Dustin and the company controller.

What comes after

What an owner can’t know is what the result will be when employees have an ownership stake in the business.

For most ESOPs, workers must meet a minimum employment duration before qualifying, and then the account vests over time, similar to 401(k) accounts. Often, the time needed to vest in a 401(k) doesn’t impact an employee’s decision to stay or leave a company. But it can be different at an ESOP company.

Knowing they have another retirement plan that benefits them as employee-owners can mean longer employee tenure. The ESOP has definitely had an impact in employee longevity at Sacramento, Calif.-based distributor Chem Quip.

“We have quite a few employees who have been here for more than 10 years,” says Steve Hubbard, CFO. Chem Quip became an ESOP when owner Don Aston wanted to divest the company, but also make sure his employees were taken care of. The company worked with an ESOP attorney to set up the program. “Everybody was excited about it because they have ownership in the company,” he adds.

And, just as the employees are more invested, so is the company. An ESOP isn’t an ownership structure that’s easy to change, so a private owner contemplating this course needs to consider it carefully.

Knowing that this could be the succession path allows an owner to mentor whoever will run the company after the owner departs, which makes the transition smoother for all involved.

“It’s critical because at some point in time, the next generation is running the business and they need to hopefully continue the culture and continue the success of the organization,” Hubbard says. “So, they really need to be part of the decision-making process as soon as possible.”

With the corporation, it makes ownership for Aqua Blue more fluid than an ESOP model would have.

The eight employee owners’ stock went back to the corporation — as did Underwood’s brothers’ stakes. But the corporation model allows others to buy stock, like Dustin Underwood did five years ago. Underwood’s daughter, Terri Underwood Payton, also is involved in the family business and Underwood expects her to buy into the corporation, too, making the business solely owned by the third family generation.

“Everybody’s on that same page,” Underwood says. “Now, how do we get there from here? I think that’s a struggle everybody in the pool industry has. Making that transition smoothly, where it works for everybody, that’s kind of the challenging part.”

How to start

Transitioning a business well takes planning. And that means starting early.

“If they’re in their 60s, they’re behind the gun,” says Scot Hunsaker, managing partner of St. Louis-based Ardent Group. He recommends 10 years for readying the business and new owners. Of course, it can be done more quickly with help.

Including the next ownership in meetings and client calls gives the owner the opportunity to have conversations about the business and have the “heir” learn through osmosis.

“I believe when you pick a leader, you let the cream rise to the top,” Hunsaker says. “Because that’s going to give credibility to not only that individual from you, but it’s also going to give credibility to them in front of their coworkers.”

Rather than run to the lawyer and have that person put together the ownership or succession agreement, sit down and have meaningful conversations describing how the business will work and run, along with the vision for it.

Asking questions of the new owner — and possibly that owner’s spouse — will help figure out how the business will work before involving a lawyer, and Hunsaker has some recommended discussion points:

• What does it mean to be an owner?

• Do you want to have partners?

• What are your goals as an owner?

• Who are going to be the owners who take over?

• How are you going to treat a child who’s not yet in the business?

• How would you value the company?

• How will you guarantee corporate debt?

“The more questions and what ifs you can come up with, the easier it’s going to be later,” he says. “I think the key to success here is predictability.”