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Step 12 - Plan For Your Succession and Sell Your Rep Business

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Thinking of selling or buying a manufacturers’ representative business? Here are resources to help go through the process so it works out well for both you and the other party. 

Sell Your Rep Business

Beginning Succession Planning

By Michelle Jobst

© Ivelin Radkov | stock.adobe.com

As the owner of an independent rep sales agency you have signed the contracts, your firm is bringing in good opportunities for your principals and you have a solid business plan to develop and care for your customers in the coming years. At what point then should you begin thinking about your exit plan? I like the saying “Begin with the end in mind.”

Your departure from the business might not be on the horizon but acknowledging that a solid plan brings better results helps to pave the way for the beginnings of succession planning. Reps are the constant in the territory. Remember that your manufacturers are counting on you to have excellent sales coverage now, and a seamless transition if ownership ever changes.

Your plan can be informal or very detailed, but I suggest that it should identify the following items:

  • Your vision.
  • Key players.
  • Timing.

Vision

For starters, know what you are building and why. You will want to map out your goals and objectives to get there.

In all phases of your agency growth you need to know the key numbers. You should know your finances and what needs to be covered now and in retirement. Do you track the important items related to the value of your firm at any given time? How have you defined what attributes you think are important to success in your territory? Your answers shape your overall vision.

Next, be ready to share your plans and changes with your key players.

Communicating Your Vision to Important Teammates

You are the expert on running your rep business. Success isn’t achieved by living in a vacuum. There are groups and people with whom you will want to share your vision and listen to their feedback.

The deal and details are important. You will want to develop key advisers who can weigh in on important issues related to a future sale. Acquaint yourself with possible advisors now to learn the type of advisors you may need in the future. A few types of consultants to consider are lawyers, bankers, accountants, financial planners, and business valuation specialists. You might also have use for a business broker.

Allow yourself time to get to know possible vendors over time. You should be sharing your long-term objectives with them. Their guidance will be important to hear as you make a plan.

Your principals and customers are interested in different aspects of your company’s vision. Share areas that help them understand that you have a plan for handing over the reins, that you understand what is required to support their needs, and that you have an eye on supporting them in the future.

Key employees and potential partners are also important teammates. Help your organization know that there is a plan for the agency to be around for the long haul. Sharing goals and objectives helps them learn how they can participate and be a part of the successful future. It also serves to give people the opportunity to become aware of the future business ownership possibilities for themselves.

Timing

Simple questions you might ask related to the timing for executing a succession plan are these:

  • When do you think you might want to retire?
  • How quickly and how much time is needed to gather information that advisors will need about your business?
  • What additional time will be needed if a contingency plan is required? These days it is even more important.

You may not have every detail decided upon and your plans can change. If you have not started on succession planning, this gives you a place to begin thinking about what is required for your eventual exit and what needs to be in place to maintain success in the territory.

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Successful Succession: A Second Time Around

By Jack Foster

“With advancing years, a manufacturers’ agent may be confronted with a problem peculiar to the nature of his business. Briefly stated, it is this: What becomes of his business, his valuable customer list, contacts and contracts when he is obliged to retire, or when he dies? Obvious answer: His business is sold.”

Scott Howells knows the importance of a good succession plan.

That scenario, outlined more than 60 years ago in an issue of The Agent and Representative — now Agency Sales magazine — rings as true today as it did then. And, if there’s any doubt that history repeats itself, have a conversation with Scott Howells, who’s gone through the exercise twice — first, when he took over Energy Solutions, Inc., Elkhorn, Nebraska, several years ago, and then again when he recently retired and turned over the reins of the agency to managing partners Adam Nelson and Mike Amfahr.

The agency’s founder, Charles E. Howells, started servicing utilities in Iowa and Nebraska in 1968, when he moved to Omaha as an A.B. Chance salesman for the territory. He worked with Chance until 1976, when he began working as a manufacturers’ representative. In 1982 Howells set up an independent manufacturers’ representative firm, C.E. Howells Sales Company. Howells Sales continued to grow and in 1997, the agency name was changed to Energy Solutions, Inc. The year 2012 marked the firm’s 30th in operation as the Howells Sales / E.S.I. firm.

Now, as then, the mission of the agency has remained the same: “The purpose of our business is to provide our clients quality electrical products and services to keep their systems safe, reliable and in business. We do this by focusing on the needs of our clients and by creating the most economical long-term solutions for their power requirements. Service and professional integrity with all of our clients and manufacturers have always been integral parts of our work ethic and corporate culture.”

Happily situated in retirement in Florida, Scott Howells recalls his start and two bouts of succession planning with the agency: “A couple of years after my father opened the agency, he asked me to join him. I was just starting out in my career and doing a little bit of this and a little bit of that. While I felt I really wanted to do something on my own, I agreed to give it a try.” That try lasted a good 35 years.

Charles E. Howells is the agency’s founder.

In describing what the relationship between father and son was at the beginning, Howells good-naturedly voiced some agreement that it was a little like what Mark Twain said many years ago: “When I was a boy of 14, my father was so ignorant I could hardly stand to have the old man around. But when I got to be 21, I was astonished at how much the old man had learned in seven years.”

Adding his own words to Twain’s, he says, “I think there might have been pressure on the part of some manufacturers to have someone join the firm. As I look back on those early days, I’d say it was like so many other father-son relationships — there were some occasions when each of us thought the other might be an idiot. That was hardly the case, and now after 35 years, I’d have to say it was the best decision I ever made.”

Recalling his first experience with a succession plan, Howells notes, “I was probably the driver when it came to developing a plan. My father brought me into the firm as an equity partner. From the beginning we agreed that I would gradually be brought into all aspects of the business and when he reached 65, succession would take place. In addition, whenever we had our annual meeting with our attorney and accountant it was always emphasized that we should think about a succession plan earlier rather than later. There was really no big change in how business was conducted; it’s just something that happened over time. What I did do for our manufacturers, however, was to put a presentation together that spelled out what our plans were and how they would be rolled out. Manufacturers saw what was happening long before anything really happened. Likewise with new manufacturers that we represented, we’d use a modified version of that plan. This was all done to open and keep open the lines of communication.”

Adam Nelson, CPMR, Vice President

If things went smoothly the first time around, it sounds like the second succession experience was even better when he turned the business over to son-in-law Adam Nelson and Mike Amfahr. Once the succession plan was executed, Nelson serves as the agency vice president, and Amfahr its president.

“In my head there was really no difference in how we did it this time. I’d say we developed a similar plan and let manufacturers and customers know what we were doing well in advance. Perhaps, if there’s any difference at all, it’s that I got Adam and Mike thrust into the business at a faster pace. They assumed more authority early on and during the last year prior to executing the plan got them even more involved.

“While I might have had 15 years to learn all I needed to know, they successfully navigated a much quicker ‘super learning curve.’”

Part of that need to navigate a “super curve,” according to Howells, “is that the level of business activity when I took over was so much different from what it is in 2020; thus the need to speed up things.”

Howells was also quick to point out the importance of what he learned about succession planning from the MRERF CPMR program. It should be noted that Howells, Nelson and Amfahr all hold the CPMR certification.

“In my opinion what we went through was seamless and really painless. Obviously we had documents to sign and there were some tax consequences, but I really can’t recall any difficulties.”

Mike Amfahr, CPMR,President

Howells’ take on the process is mirrored by both Amfahr and Nelson. Commenting on why having a succession plan in place is important, Amfahr, a veteran of more than 23 years with the agency, says that “In any business — and especially the rep business — it’s especially important to have a show of continuity. It’s a high priority for principals and customers, and the agency’s employees certainly want to see that there’s a plan for the future.”

Nelson, who joined Energy Solutions in 2006, adds, “In the business we’re involved in there’s a certain amount of fragility and there’s always people changing shirts from one team to another. When you’ve got a plan in place for the future that provides individuals with a certain sense of pride, not to mention putting employees’, principals’ and customers’ minds at ease.”

As Amfahr recalls working his way through the succession plan, he emphasizes that “Scott knew how important having such a plan was to principals and in crafting what we eventually did, the agency’s employees were uppermost in his mind. He was looking to execute a seamless transition and he simply sat us all down and got the job done.”

He does admit, however, “Perhaps at the beginning, Adam and I shared some concern in that we were just getting a little bit of information about the succession a little bit at a time. It seemed to us that we were taking ‘baby steps’ related to what the future was going to look like. I think that might be related to a reluctance on the part of the former owner to let go. I think it’s difficult to work so long on something and deep in your heart it’s hard to let go.”

In terms of when to start thinking about a succession plan, Amfahr emphasizes that “It’s never too early to put it on the tee and get things started. If there are any disagreements along the way, that gives you plenty of time to iron out differences.”

When it comes to actually communicating what was going on with the agency for the future, Nelson explains, “We’ve been messaging our plan over that last couple of years. Our principals have always been kept in the loop and with customers especially I made it a habit to begin any meetings with an explanation. I’d say something like ‘I’m Adam Nelson. Our company is involved with energy and for those of you who have a history of working with my father-in-law and grandfather-in-law, thank you for your business. Here’s what we’re doing and here’s the date the change will take place. We found that with that approach, everyone had an interest in continuing their business with us — they were invested in the future.”

And, speaking of the future, both Nelson and Amfahr haven’t forgotten what they learned about the recent past. According to Nelson, “Once Scott left the business, we realized that we had to immediately start thinking of the future and what we might do differently. Everything began to gel for us once we got the plan from Scott written in ink. We’ll plan accordingly.”

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Succession: Planning Makes Perfect

By Jack Foster

Steve Hanson

It’s no easy or automatic task to successfully plan an exit from an agency. Perhaps one of the more successful efforts in this direction can be seen in the experience of Steve Hanson, Western Safety Associates (WSA).

Established in 1974 and headquartered in Corona, California, WSA boasts more than 40 years of expertise in sales and distribution serving manufacturers in industrial safety, construction, medical, aerospace and industrial distribution marketplaces. The agency’s outside sales force is supported by customer service personnel, distribution staff and a warehouse distribution center in Corona. The WSA sales team is composed of representatives covering the Western United. States.

As he looks back over his career and describes how he reached the point where he began thinking about planning an exit strategy, Hanson explains, “While in college I worked part time ‘for food’ with a safety equipment distributor. The head of the company, Ed Mossinger, began coaching me and moved me up from the warehouse into offices’ services and then into the field as a sales associate. I spent a few years with Ed and then was recruited to WSA as a manufacturers’ representative. I started working as a junior sales associate in the 1980s at WSA.”

He continues, “Back then, the agency was a partnership between two men. In 1984 I was promoted to a position in the outside sales team and then later, as the result of a strong performance, was offered the opportunity to buy into the partnership. I accepted this opportunity. Our partnership evolved into my becoming the sole owner of WSA over the 30 years that became my career.”

As to how and why he was attracted to markets that WSA serves, Hanson notes that “The agency has always been a health- and safety-based agency. I enjoy health and safety and I take it seriously. It is a tremendous responsibility knowing that the consequence of us doing our job well means that we’re making people’s work environments safer.”

He adds, “Over the years WSA has gained a reputation for professionalism, integrity and a strong sense of conviction in the superiority of the products we sell. Our fluency between product lines and extensive knowledge of product capabilities distinguishes us when working on an end-user level. WSA end-user marketing targets the following sectors: manufacturing, construction, municipalities (city, county and state), oil and gas, mining, utilities and food processing. We constantly take pride in our ability to meet the needs of customers by evaluating their goals and recommending the right product for the right application. Our solution-based approach and vast contact network continues to successfully promote sales in our territories; Arizona, California, Nevada and Hawaii.”

Changing Industry Profile

Steve Hanson discusses the warehousing and 3PL services that WSA provides to some of its manufacturers with Brad Kemp.

Given his more than 30 years spent as a rep, Hanson can attest to the fact that the profile of the industry he works in today is quite different from what it was in 1984. “Definitely there have been changes to the manufacturers we work with. Originally, most of the manufacturers we worked with were family-owned. Through industry consolidation most of our manufacturers are corporate- or capital-investment-group-owned. Substantial changes continue in our industry, just like I’m sure the founder who preceded me saw substantial changes.”

He adds that these “Corporate acquisitions continue to cause consolidation in our market. An expected result of these acquisitions is that relationships and performance are thrown in the air when a principal is acquired.”

A changing industry profile isn’t all that he observes. “Certainly one new major change has been the rise in e-commerce, which is certainly a threat and is driving agencies like mine to really prove their worth to manufacturers. I know that in our niche we are still a necessary resource because if a company buys the wrong product — a product that is not compliant — it can result in injury. They need an expert to recommend products that meet the application needs.”

MANA’s Contribution

Continuing to speak of the manufacturers he and his agency have worked with over the years, he notes that MANA has been a major contributor when it came to finding principals to work with. “We are happy to be a MANA member. This membership has opened doors for us. Most of our new principals come from our MANA membership and from referrals from other representatives, distributors and even some from our current manufacturers.”

He continues, “Many manufacturers tend to go back and forth with their sales strategy between having their own inside sales team to relying on rep agencies like mine. That has always been in a constant state of flux. But now more than ever they are looking to the agency to demonstrate their value. It’s hard to show an ROI on face-to-face interactions and relationships, which is what we cultivate. We have tried to do this by adopting a CRM system to track our engagement with customers and distributors, but we don’t have it down to a science yet.”

The Succession Plan

Finally, on the subject of his transition from the agency, Hanson explains, “Approximately four years in anticipation of my leaving, I began succession planning. I hired a consultant to work with me in identifying my goals for leaving and my goals for the continuity of the agency. It’s not been a task without challenges, but I think by contemplating the future I was able to prepare my agency for the next phase.

“In 2019 I initiated a buyout agreement between myself and a group of key reps that I had worked with and mentored for several years. I now maintain a key role on our advisory council, but we’re working to transition me out of day-to-day management of the agency. These reps included in the buyout will be leading my agency into its next phase. By getting a jump on this process, I am able to have a role in shaping and training them to thrive after I step away.”

As the transition plan evolved, Hanson explained, “We did lean heavily on MANA, which had published several helpful articles on this subject, but aside from that there were not a lot of resources out there for a small agency like ours. It’s unfortunate and does make it that more challenging for a small company to carry out the task of succession planning and execution.”

He explains that basically it took about a full year to negotiate and complete the buyout. “We are still in a state of transition six months after the agreement was signed, but I hope over the next 12 months I’ll be off-duty as an executive.”

As to whether the journey from start to completion was free of any problems or concerns, he observes that “No change can be made without challenges.”

But he concludes with this bit of advice to other reps planning their orderly exit from an agency, “Read everything you can. For me it was very helpful to seek professional services for the appraisal of the company, for the legal aspect and help from my accountant regarding tax implications.”

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Succession Planning and Valuing/Buying/Selling/Merging Representative Firms

By Charles Cohon

© Flamingo Images | stock.adobe.com

In this article we look at succession planning strategies to consider, pitfalls to avoid, and real-world examples of manufacturers’ representative firms that have successfully transitioned to new ownership.

But first, a disclaimer. I am not a lawyer. I am not an accountant. This article will share with you some strategies to discuss with your lawyer and accountant, but this is not legal or accounting advice and it is not intended to replace the advice of the legal or accounting professionals who will be crucial to the success of your succession plan.

And we can’t start until we discuss the elephant in the room. It’s a little bit embarrassing even to bring this up, but it still happens sometimes, so we have to talk about it. The elephant in the room is reps who don’t have a succession plan and just gradually slow down until their principals get frustrated and terminate them.

And, sometimes, rarely, even worse things happen.

I have a sad, true story to tell.

I represented a line of terminal blocks in Illinois. I was doing a great job in Illinois, so the sales manager eventually asked me if I could take over the Wisconsin territory. He sheepishly explained that the representative in Wisconsin had not returned his phone calls for months, and that a year or two ago the representative had spun a convincing yarn that convinced the principal’s bookkeeper to mail his checks to an address in Florida.

When I started making calls on Wisconsin customers, no one had seen the representative for years. And the rest of us who represented that manufacturer suffered because that sales manager kept all his reps on a much tighter leash thereafter.

What happens when there is no succession plan?

  • It’s unfair to the representative’s principals who were expecting the representative to grow their sales.
  • It’s unfair to the representative’s employees, who know their employer is headed straight for a cliff.
  • It’s unfair to other representative firms and the representative profession because it gives manufacturers’ representatives a bad name.

And it’s also a risky move to take for the retiring representative. Principals may look at an aging owner with no succession plan, assume the worst, and terminate that representative firm abruptly.

Looking at this from the principal’s side, what the representative calls succession planning, the principal calls business continuity planning. Replacing a representative is a tremendous amount of work. Recruiting. Interviewing. Evaluating. Training. So, it’s understandable that if a representative firm with no succession plan looks like it is declining, the principal is going to execute business continuity planning to protect sales in that territory. And the principal’s business continuity planning is going to be on the principal’s timetable — not the representative’s.

Getting Started

So, let’s get into what you need to do to get started on a succession plan.

Your first question might be, “When do I need to start this process?”

Let me put it this way. Say that you became a grandparent on the same day that you decided that you wanted to retire. On the same day you have completely retired, handed over your set of keys, and walked away from the business, you can probably walk that grandchild to his or her first day of kindergarten.

That’s right — five years from the day you decide you want to retire to the day you are actually 100 percent out of the business.

Why does it take so long? Because if you leave abruptly you risk losing your principals, and once you have lost your principals you no longer have a representative firm to sell.

At the end of a successful succession transition the representative firm will have continued on without anyone even noticing you have left, because you gradually faded from sight instead of suddenly disappearing. Not being missed may not be great for your ego, but it is excellent when it comes to helping insure that representative firm’s revenues and your monthly buyout checks continue uninterrupted.

How do we start?

First you need to find a prospective buyer, which should be right up your alley, right? You’ve been a salesperson for 25 or 30 years, or longer. Finding buyers for your principals’ products is in your DNA, so finding buyers for your representative firm shouldn’t be too great a challenge.

The most common and successful way to find a buyer for your representative firm involves even more planning. You make a point to hire some younger people who seem like they might be candidates to take over the firm someday, and at least one of them turns out to be a likely successor. (One representative jokingly claimed that his succession plan involved having a child 35 years ahead of his planned retirement date; but a 35-year time horizon is impractical for most of us!)

Another way to find a seasoned candidate is to consider a direct salesperson, district manager, or regional manager from one of your principals. Two risks to consider are:

  1. Could that direct employee perhaps launch their own representative firm and take that line with them?
  2. Would the principal consider that to be poaching and terminate you for stealing their employee?

Time to tell another true story.

One of the best regional managers my representative firm ever worked with was about 15 years younger than I, a degreed-electrical engineer, had a great work ethic, and a perfect personality for sales.

Twenty years ago he came to me privately and said he was resigning his current job to take a better-paying regional sales manager position at another company. He’d still have heavy travel and had young children, but the money was good.

I told him that I couldn’t recruit him while he was working for my principal, but once he gave notice, I’d like to make him an offer. I could match the pay he’d be getting at his new employer and I also could offer him no overnight travel. Staying close to his children was important to him, and he agreed to give me a heads-up as soon as he gave notice.

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Making the Right Choice

As soon as he gave notice, I called my principal’s national sales manager and asked permission to recruit my ex-regional manager. The national sales manager was thrilled at the prospect at keeping an excellent regional working his product line, and everybody won.

Other candidates to buy your representative firm might be a representative in an adjacent territory who you share lines with, or a representative in your own territory who has complementary non-competing lines. To oversimplify, if you sell nails, a representative who sells hammers might be an excellent candidate.

Once you have identified a prospective buyer, it’s time to negotiate a valuation for the firm.

How do you value a firm with no inventory, few physical assets, and income tied to representative agreements that often are subject to termination on 30 days’ notice?

Generally, most of the value of a representative firm is the stream of income from future commissions. The valuation formulas discussed in this article are different ways that have been used to value that stream of future commission income.

Here’s how I valued my representative firm:

First, you should know that my firm got more than half its income from one principal. As long as that principal stayed with my firm, that stream of income would be very healthy. If that principal ever terminated its agreement with my firm, the new owner would face some significant financial challenges.

So how do you arrive at a price? I wanted to participate in the potential for commission income growth, and the buyer wanted to be sure he was not locked into a monthly payment he could not sustain if that major principal terminated the firm.

We agreed on a multiplier of 1.0 of the firm’s commissions, but which commissions were we going to base that on? The past calendar year? The average of the past three calendar years? And what happens to the payout if the big principal terminates the representative firm?

As long as we were valuing the firm as a future stream of income, we decided to tie the selling price on that future stream of income. And the agreement we struck was that every month for five years the firm would pay me 20 percent of its gross commission.

Five years times 20 percent per year works out to 100 percent, which is the 1.0 multiplier. If the big principal stuck with the firm for all five years, I’d have a very nice payout. If the big principal terminated the agreement shortly after the sale, then the payout would drop accordingly.

That certainly seemed fair. Neither of us could predict the future, so we set a percentage of gross income instead of a specific-dollar figure.

Valuing the Firm

The way I did it is just one of many ways representative firms get valued. But generally, the valuation tends to hover around 1.0 to 1.5 times commissions with a payout over seven to 10 years. Just like with a credit card payment, the longer the buyer stretches out the payments, the larger the total amount of those payments works out to be.

In my case, setting the payout over five years turned out to be too aggressive so we ended up renegotiating the payout so the representative firm would not be starved for cash.

After choosing a valuation formula, you may need to go back and adjust the final price based on factors such as these:

  • Did the buyer personally guarantee the payments or did the guarantee come from the buyer’s corporation?
  • The value of any equipment or inventory being sold with the representative firm has to be added to the price.
  • If the representative firm has shaky relationships with any of its principals, some discount of the selling price should be considered.
  • If some of the principals are financially shaky and might not be able to pay earned commissions, some discount of the selling price should be considered.
  • It is reasonable for the seller to ask that commissions received after the representative firm is sold on orders that were closed before the representative firm was sold should pass through to the seller.

Sometimes two representative firms that plan to merge have competing principals on their line cards. Because the merged firm can’t have competing lines, one or more competing lines will have to be dropped from the merged firm’s line card.

After dropping those lines, the merged firm initially will have less income than the total income the two representative firms had when they were separate. This is a case where one plus one equals one-and-a-half. This reduction in the revenue stream for the combined representative firm may need to be factored into the price.

Considering an ESOP

For larger representative firms, another way for the owner to convert the value of his or her share of a representative firm into retirement income is to establish an employee stock ownership program or ESOP. An ESOP is a defined contribution plan that must meet IRS requirements for a retirement plan and is regulated by the Employee Retirement Income Security Act (ERISA). An ESOP buys back employees’ shares when they retire, and can even take out a loan to buy back those shares.

Costs to establish an ESOP can range from $50,000 to $100,000 the first year, and annual maintenance of the ESOP can range from $15,000 to $30,000 in subsequent years.

Zink Foodservice, a representative firm in the food service industry, recently announced that it established an ESOP for its 75-strong workforce. Zink reports that the ESOP provides employees a sense of stability and makes them stakeholders in the company’s success, and they consider it a tool for employee retention.

And of course a principal who is concerned about business continuity planning will also take comfort in the degree to which an ESOP addresses representative firm succession planning.

Now that we have a seller, a buyer, and a selling price, it’s time to look at some of the terms of sale:

  • Claw-back provision: If the new owner is running the company into the ground (as evidenced, perhaps, by missing payments to you) you want to regain control of the company quickly to minimize the impact of that mismanagement.
  • Life insurance: During the transition, both the buyer and seller have significant investment in the process. Life insurance on the buyer’s life and the seller’s life can cushion the financial impact on the surviving party of a deal that could not otherwise go forward.
  • Sale of assets or sale of stock: Topics for discussion with your tax professional should include topics such as:
    • If just the assets are sold to a new representative firm, the new firm has to convince the principals that wrote representative agreements with the seller to transfer those agreements to the buyer. Also, in an asset sale the seller generally pays more tax than would have been paid if it had been a stock sale.
    • If stock is sold, the buyer faces tax consequences that the buyer would not have faced in an asset sale.
  • Covenant not to compete: The buyer will want assurance that the seller won’t get restless in retirement and open a competing representative firm, so the seller will be asked to sign a covenant not to compete.

Now that the seller and the buyer have agreed on the price and terms, it’s time to get buy-in from the principals. Because if the principals are not happy, nobody is going to be happy.

So it’s time to get on an airplane and introduce the buyer in person to every important principal. The principals need to know:

  • You are executing a succession plan that ensures business continuity for your principals.
  • You are committed to a smooth transition and you will remain involved with the company for years to come.
  • You have vetted the buyer thoroughly, and that the buyer is a talented manager who will continue to grow the principal’s business.

In closing, if you have any doubts that succession planning can work, this list of manufacturers’ representatives who have represented Eriez Manufacturing of Erie, Pennsylvania, for at least 50 years, and through at least one successful succession of management, should put those doubts to rest:

  • 70 Years — Dominion-Carolina Sales, Inc., High Point, North Carolina — second-generation family
  • 68 Years — BLW Group, Inc., Memphis, Tennessee — second-generation family, third-generation management
  • 63 Years — Merrifield Co., Cincinnati, Ohio — third-generation family
  • 61 Years — B&H Industrial LLC., Indianapolis, Indiana — third-generation family
  • 55 Years — D&L Engineering Sales, Halifax, Nova Scotia — second-generation management
  • 54 Years — Adams Brothers, Inc., Atlanta, Georgia — second-generation family, third-generation management
  • 50 Years — Vision Process Solutions, Montreal, Quebec — second-generation family, third-generation management.

With these many successful succession plans executed by the representatives of a single principal, it’s clear that a carefully executed plan can make it possible for a representative firm to enjoy decades of commission revenue, fund its founders’ retirement, and even fund the founder’s successor’s retirement.

For more information about succession planning, visit www.manaonline.org or e-mail mana@manaonline.org.

Success Story #1

Sam went to work for a representative firm in 1982 and bought it in 1996 using MANA resources to help value that firm.

April owned a representative firm that represented the same major line as Sam in a sales territory adjacent to Sam’s territory. In 2006, April approached Sam about buying her out. Sam had reservations because April’s income was very heavily concentrated with that principal.

Sam completed due diligence with the principal, and what he remembers most about that meeting was what the principal told him: “As long as you take care of April we’ll be happy.”

And Sam was also reassured that the principal was privately held and planned to stay that way.

Five years after Sam made the final payment on the five-year payout to April, he reports that the transition went extremely smoothly. He’s 61 now and reports it’s his turn to start the process of being the seller instead of the buyer.

Says Sam, “That principal is a stand-up guy, and I made my decision based on my discussion with him.”

Success Story #2

Sandra and Joe were both direct-factory salespeople until 1995 when they formed their own agency, DEF Reps. Recently, they executed their plan for Sandra’s retirement and to bring in a successor. Sandra remains involved in the business, selling to key accounts.

DEF exemplifies the value of advance planning.

Sandra gave Joe 10 years’ notice of her intent to retire, and they started looking for Sandra’s successor five years ago.  Joe bought some of Sandra’s shares so he could be the majority stockholder, and the new owner bought a minority share. Sandra stayed on salary for 18 months and went on straight commission thereafter.

Here is how Sandra put it: “From day one, when Joe and I decided to go independent, we always had a 50/50 buy/sell agreement, 50/50 with first right of refusal when shares were sold.”

It took some real work to find and recruit the right successor, which is one of the reasons advance planning is so important.

Another part of advance planning was that Sandra and Joe met with major principals in advance to get their blessing.

Their largest principal offered to support the transition with extra training and back up for the successor, because that principal says a successful transition benefits everyone.

Success Story #3

XYZ Reps has represented its largest principal for 15 years, but George has represented the principal for 35 years if you include his time as district manager for that principal.

After working as the principal’s district manager in a major market, George started his own representative firm to represent that principal in 1994, and ultimately merged his firm into TUV, a larger firm that represented that same principal in 2002.

TUV was founded in 1974, and is now thriving under the management of the founder’s nephew.

TUV’s founder’s passing highlighted the importance of succession planning, which is an area where the TUV has really set the gold standard.

TUV’s plan establishes a share value annually for the firm’s stock redemption agreement, and had key-person insurance to be sure that the value of each owner’s share is covered to compensate the estate for that share.

When I spoke to TUV’s president, he put it this way: “We have a structure. And we check our egos at the door. Any one salesperson may have a great year and others not. Everyone knows what their monthly income will be and any excess is dispersed in proportion to each owner’s shares.”

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More Advice on Succession Planning

By Jack Foster

In the article that precedes this one, MANA President and CEO Charles Cohon takes aim at the subject of succession planning. As he draws upon real-world examples of why succession planning is so critical and addresses many of the how-to steps to take in order to get the job done, it’s worth noting that MANA and Agency Sales magazine have for years espoused the critical benefits of planning, forming and executing an effective succession plan.

© freehandz | stock.adobe.com

More than a decade ago, under the heading of “There’s No Success(ion) Without a Plan,” this publication pointed out that the existence of a workable plan is…

  • …critical for the owners of an agency if they plan on the firm operating successfully well into the future.
  • …of prime importance for principals that deal with the agency. Those principals have a vested interest in knowing that the agency that they’re going to market with has a plan to professionally and efficiently serve the territory and to maintain customer relationships long after current ownership has exited the business.
  • …an integral ingredient of any agency business plan — and hasn’t MANA stressed the importance of business plans for years?

While the above are important considerations for agency owners, it’s a safe bet that customers, employees and manufacturers have more than a passing interest in an agency’s future plans. Perhaps manufacturers are more concerned since customers and employees have more, quicker and easier options if there are no future plans. Even in a tight job market, good salespeople have value and customers always have options.

Manufacturers’ Concern

The typical manufacturer that has cast its sales and marketing lot with independent manufacturers’ reps is apt to be very concerned as to whether a sales team will be still there in five to 10 years. Those manufacturers would certainly want to be sure that the adequate steps have been taken in order to assure a smooth succession, with no disruption of business. That’s why — as Cohon emphasized — it’s important to decide when and how to proceed.

As previously suggested, a five-year period might be the best lead-time when it comes to preparing for a business exit. In any event, the answer to the question “When do you want to leave the business?” will point the seller in the direction they want to take when it comes to preparation. If the answer is a year or less, there are strategies you cannot implement if you expect to see the results manifested prior to marketing the business. However, there are plenty of things you can do in a short time period. Cleaning up your financial statements is one of those things. Eliminating the excessive blending of personal and business expenses is something that’s easy to do. Banks and buyers like to see a healthy bottom line, and the extra tax you pay will come back to you in multiples.

Preparation Is Key

It’s not unusual for buyers and banks to want to see financial statements and tax returns from the recommended five-year preparation period of time. It allows the business the time it needs in order to show the effect of any strategies that have been undertaken as part of the preparation process. Preparation might very well be the key word here as preparing properly allows the agency owners to reap the following benefits:

  • Much of the work that is done to prepare for an exit or sale improves the business, so the owner benefits over the years prior to exit.
  • Banks and manufacturers will view the effort in a positive light in that it should open up financing and provide additional lines for an owner to sell.
  • It also prepares the agency in the event a catastrophic event hits. The agency won’t be forced into a panic sale or liquidation.

No planning is complete without a team in place to get the job done. That’s why it’s so important to have reliable counsel in the presence of proper legal, business and accounting advice.

Who’s the Buyer?

Next is the question: “To whom are you interested in selling the business?” Is it family, staff, or an outside buyer? If it’s an outside buyer, is it an individual, equity group, or another rep firm? These are important questions and often are not considered. What you do with the business could very well differ depending upon the logical buyer.

Consider, for instance, if the buyer is a family member or employee. If that’s the case, then part of the succession plan may involve coaching and training them on running the business.

If the path followed is not to a family member or employee, then chances are the tactics will be different. An outside buyer, for instance, certainly wants to be assured that profits will continue and that systems are in place to make the transition smooth. Above all, they do not want the business to be overly dependent on the owner. To put it another way, they want high company goodwill, not high personal goodwill.

Financial buyers should be considered as those who need a salary and profits, and they usually want to be the company president and decision maker. Strategic buyers often are in the same or a similar industry; they care more about growth, management capabilities and the ability to absorb overhead.

As MANA’s top executive emphasized, valuing the rep firm remains an important consideration. The answer to the simple question “What is the agency worth?” is not as simple as the question. In general terms, the value of a business is a function of the business’ profit. Usually, the higher the profit, the higher the value of the firm. Profit is a term that has different meaning to different people but a business appraiser will typically determine profit by adding together the net income on the tax return, plus the owner’s salary and owner perks, and then simply subtracting a fair market management salary for the running of the business.

Charley Cohon went into some detail when it comes to valuing the rep firm and that’s a subject worth revisiting by re-reading his article.

Informing Manufacturers

But a final consideration when it comes to succession planning might very well be that of communication. It can’t be stressed too much that involving the agency’s principals in the planning process is incumbent upon the agency owner. As Agency Sales and the association have underscored in the past, sharing plans might be a difficult matter since many manufacturers may not want to hear that you’re ultimately leaving the business. But failure to do so will cause them to cast considerable doubt on your abilities as a professional businessperson. The important consideration here is to have a well-thought-out plan in place. Once that’s done, share it with principals and ask for their feedback. Gauge their reaction and be open to their suggestions when it comes to moving forward.

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Step 11 - Work Effectively With International Manufacturers