We’re on the brink of a new era in the pool and spa industry. As a generation of mom-and-pop owners look to retirement, a new generation is coming to the fore: their children. Now young adults, these “kids” are thinking about their future — which many hope lies in the very store their parents founded. It seems natural, then, for these young professionals to consider buying the family business. But when business and family mix, things can get messy.
“It’s really hard for a young man or young woman to sit across the kitchen table from their mom and dad and say, ‘I want to buy your business,’” says Rod Sterling, president at the Sterling Advisory Group in Sandy Spring, Ga. Sterling is a veteran of the pool and spa industry and has 30 years of experience buying and selling small businesses. When it comes to keeping it in the family, he’s seen it all.
“It’s a fiscal event, it’s a philosophical event, it’s a personal event and it’s a family event,” he says.
It’s also a massive undertaking for everyone involved.
“Most of these young people don’t know what to do. Even if they’ve got a good accountant, a good attorney, if they’ve got somebody who knows the business, one of the first questions is, ‘Where do I start?’”
Start with the money. According to Sterling, most second-generation people in the pool and spa industry have one main question about the buying process: Will the money go far enough?
“They say, ‘I want to buy the business from Mom and Dad. Mom and Dad own the building, so I’m going to lease the building back from them. So I’ve got to pay them rent, which is going to be part of Mom and Dad’s income, and I’ve got to have enough money to pay my debt service to Mom and Dad to pay them since they’re not working, and I’ve got to have enough money to pay me. Can the business itself support me buying it?” he says.
It’s a smart question. Yet it’s not a matter of “can,” but “should.”
“‘Should I invest in the industry? And if I’m going to, should I invest in my family business?’ And if the answer to that is ‘yes’ and ‘yes,’ and I think it should be, then it becomes, ‘How do I do that?’” he says.
Find your value first.
Your very first step in buying a business will also help you learn if it’s an economically viable idea. You need to find a third party to do a valuation of the business, which will reveal how much the business is worth.
“The valuation will tell you it’ll support X, but it won’t support Y,” Sterling says.
Another reason it’s important to get an outside opinion: it’s highly unlikely you or your parents know the value of the company.
“Most people think their business is worth a lot more than it is, or they think it’s not worth anything. And they’re always wrong,” Sterling says. “Even if you’re very smart and very educated and have a lot of experience, you don’t have experience doing this.”
People will see you as a kid.
The relationship between parent and child is inherently a power balance, one that tends to carry on as those children become adults, and one that can really complicate a business transaction. Not only is it possible your parents will treat you with kid gloves during the sales process, but people they know, like their longtime business associates, are likely to do the same.
“Typically, the parents pick the lawyer, the parents pick the accountant, the parent is picking the bank, so the children have these relationships which are really parental relationships,” Sterling says.
You’ll be better off if you’re on even ground, which can be accomplished by developing your own, separate relationships with the company accountant/lawyer/etc., or by building new ones altogether.
You need to keep it a secret.
If you do decide to move forward with buying the business, it’s imperative you don’t tell anyone aside from the immediate parties involved. Sterling refers to it as “graveyard-dead quiet.”
“When suppliers, customers and competitors hear a business is for sale, they think it’s in trouble,” Sterling says. “Before you even try to buy the business, it casts a shadow of doubt on the business. Your suppliers get nervous. ‘Oh, they’re transitioning? What if the kids don’t have enough money to operate? We’re going to cut their credit lines back.’ Keep it within the family and a trusted set of advisors.”
It’s going to be awkward.
The idea of negotiating with your parents and bringing in lawyers is weird enough. But buying a business requires everyone involved to take a cold, hard look at finances, which can make for an unexpected, uncomfortable conversation between family members.
“More often than not, the kids in the business don’t know what their parents are making because you don’t talk about finances. So if you’re a child and you’re going to buy the business, all of a sudden you’re exposed to your family’s finances.” Sometimes, that knowledge can make for a bumpy road. Sterling offers an example:
“What do you mean I’m only making 55K and Mom works here 30 hours a week and makes more than me?” might be a typical question. The answer is, of course, that mom founded the business.
Having siblings may make it harder.
“Many times, if there’s siblings in the business and siblings out of the business, it creates conflict,” Sterling says.
Because parents instinctively want to be fair, they may give all their kids equal stakes in the sale and transition. Which may feel a little bit unfair.
“The kids who are in the business who’ve been working their butt off for 10 or 15 years sometimes feel resentful that people who are not working in the business take money out of the business.
“It isn’t because the kids are bad; it isn’t because the parents are bad. But kids are kids and parents are parents, and they want to be fair to everybody. But what’s fair in this instance is to reward those who worked,” he says.
Since pool construction and service are male-dominated industries, gender-related issues can also arise.
“The gender favoritism in family-owned businesses leans decidedly male, Sterling says. “I’ve had stories where the son and daughter come in to buy the business, and the dad many times wants the daughter to be a mom instead of run the company. You just have to be careful of that.”
“Typically, the kids think they’re ready to buy the business when the parents aren’t ready to sell,” Sterling says.
With the help of a third party, you can mitigate the “inbetween” stage by establishing transition plans.
“In one of the deals I’m working on, the family wants to stay there three to five years, so we developed a stock purchase program for one of the nephews. Over time, he puts money down and then every year gets stock, so at a certain time, he becomes the majority owner and they become employees,” Sterling says.
But really, there’s only so much preparing you can do.
If you decide to buy the family business, you might hire all the right people and feel as prepared as possible, but in truth, the only way to know how things will go is to get the ball rolling.
“Every family is unique. Every transaction is unique,” Sterling says. “Even though the process is the same, it’s as unique as everyone you know.”
Learn more at the PSP Expo
Rod Sterling will be at this year’s PSP Expo presenting to APSP’s WAVE Young Professionals Network in a session called “Valuation & Purchase Strategies of Pool and Hot Tub Businesses.” The discussion will be geared toward those who plan to succeed their parents in the business, and include discussion about the common pitfalls of such transitions and positive ways to navigate family dynamics.
The session will take place Thursday, Nov. 6 at 3:30 p.m.
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