By Ken Peterson, CKD and Leah Peterson, SEN Design Group
Ken: I haven’t known many kitchen/bath owners who have retired from this industry as wealthy individuals. However, all of those who have retired over last 40-50 years probably banked on getting a lot more money from the sale of their businesses than they did. Many sold their companies to a lead salesperson or installer - for low down payments - only to have the operations go bankrupt in a couple of years, terminating the expected long-term payout. I have even run across a few former owners in Florida selling a kitchen every once in awhile just to make ends meet.
Leah: How sad! It must be really disheartening for owners, who have loved a business so much for so long, not to be paid what they think their business is worth. Particularly when they counted on the business sale proceeds to finance so much of their sunset years. What does it take to avoid such a disappointing scenario?
Ken: Thorough, advanced planning. Nothing beats a written strategic plan to get your business in shape to command a premium price. Unlike the conventional business plan that is drafted for startups, a strategic plan defines what your business will look like when it is completed. It forces the owner to finally put his vision for the business in writing.
Leah: I imagine most owners carry around some vague ideas in their heads of what they hoped their businesses will become. But when they are grinding away in their operations every day, putting those ideas down on paper in a cohesive, cogent manner must be difficult for them. Probably need to block out some quiet time to develop a draft or two.
Ken: No doubt. Most kitchen/bath firm owners say getting started on this vision statement, and being happy with the final draft, are the most challenging parts of creating their strategic plan. After writing a vision, the next step is to unbundle that statement into a number of written operational definitions. These phrases flesh out and clarify elements of the vision paragraph. Then measuring each of these operational definitions on a scale of 0-10 (10 being the highest rating) are called “gap analyses.” The last step is when owners establish “critical success factors” (CSFs) each year that must be accomplished to “close the gap” on the weaker-rated operational definitions.
Leah: Exactly. As you know, we just finished up this annual exercise for SEN. I believe our management team loves the involvement in shaping the company going forward. And we certainly have put a whole bunch of critical success factors on our plate for 2017! What’s great about this strategic plan document is that it clearly spells out each person’s assignments, target dates for completion, and budget amounts allocated for any particular CSFs. We can then easily track our progress during weekly team conference calls and day-long meetings - three times a year - to update the plan.
Ken: Right. The ultimate objective is for kitchen/bath owners to score 9s and 10s in all operational areas of their company to insure earning a premium price for it. Of course, this may take many years for kitchen/bath owners to realize this objective because, as you point out, they are so busy working in their operations on a daily basis – one good reason to commence this process 15 years or more before you expect to sell the business.
Leah: Fifteen years? No way! Too many industry owners today are in their late 50s and 60s without a formal succession or exit plan. That’s what is making our vendor partners so nervous about the industry’s future. How can the time-line be reduced?
Ken: Hiring an industry-specific business coach on weekly, bi-weekly, or monthly basis can substantially accelerate the strategic planning process. Getting it done in 2-3 years is then possible. But it would be dependent upon (a) what stage of development the company is in and (b) how much time and money the owner allocates towards completing the necessary critical success factors. Once done, it may take up to another 12-18 months to find the right buyer and close the deal.
Leah: Okay, that makes sense. Is there any one particular success factor that you would consider to be more critical than others? Like the centerpiece of an owner’s strategic plan to attract a qualified NEXTgen owner whether that be a current young industry professional or a corporate executive intent on doing his own thing.
Ken: Yes, actually two. The first would be a written document that details the company’s process from the client’s first hello to collection of the final check. For example, in order for me to roll out three additional showrooms in Connecticut, I had to develop a 250-page Policy & Procedure Manual that covered every step of the pathway. It was a fantastic training tool to develop top caliber personnel. And then an equally fantastic operational tool to launch the satellite showrooms that consistently generated 51% gross profit margins
Leah: Well, that may have worked in the 1980s. But it won’t work today. No one has the time, or the attention span, to write operations manuals. Today, business is all about speed and efficiency … which is why technology has been driving breakthrough successes in every industry it seems but kitchens/baths. That is, until now. Fortunately, our members are gaining serious traction with the first-ever, all-in-one marketing, selling, and management software that is industry-specific. A company’s unique process gets embedded in this platform for all team members to follow. The impact is transformational. What’s the second pivotal success factor?
Ken: The second is a business valuation. Frankly, it’s not a bad idea to have one done every year to measure company progress. Accountants use a variety of methods for calculation. But I prefer the one business brokers typically use which recasts the owner’s income before (a) applying a multiple on net profit for a company’s intangible value and (b) adding balance sheet assets. We have used this same methodology even in helping an aging SEN member value his business for a son or daughter to buy it.
Leah: These topics – how to develop a strategic plan, documenting a successful sales process, correctly valuing your business for sale – are three of the ten workshops being presented at the inaugural NEXTgen: Future Business Leaders Conference. Sponsored by some progressive- thinking vendors, it’s scheduled for this fall in Austin, TX. With two educational tracks – one for business startups and one for buying an existing business – this educational event should draw the interest of young, current industry professionals with aspirations of owning a business some day as well as individuals considering entry into the creative, expansive world of kitchens and baths. Who knows, maybe even a few existing owners will show up wanting to learn about smart exit planning or perhaps to meet a potential business buyer.