Originally posted – Nov issue/2012

Building a Successful Multi-Generational Laundry Business

Like most self-service laundries, the World’s Largest Laundromat – located in the Chicago suburbs – is a family business.

“I’m always telling people it’s a family business, but ‘family’ is only the adjective,” said owner Tom Benson. “The noun is ‘business.’ That’s what we are. Every decision we have to make has to be what’s best for the business.

“You address family issues in another context, but you don’t do it through your business. When you do, you’re handicapping your business, and you’re likely going to cut into your sales and your profits.”

Or, as South Carolina laundry owner Jimmy Brinkley put it, “Keep business business, and keep family family. We have business meetings, and we have family meetings. But you can’t bring them together.”

Approximately 90 percent of the 21 million U.S. businesses are family-owned, and one-third of the Fortune 500 are either family-owned or family-controlled, according to statistics from the Small Business Administration. Yet, the SBA reports, only 30 percent of family-run companies today succeed into the second generation, and an even smaller 15 percent survive into the third. The reason, according to many experts, is obvious: the lack of an orderly succession plan.

“It is a daily miracle that there are any owner-managed firms left in the world with so few making plans for their own continuity,” said Leon Danco, founding director of the Center for Family Business, based in Cleveland. “The toughest thing for the entrepreneur to realize is that time is constantly running out. Most owners don’t plan because they don’t think they are ever going to retire or die.”

At 67 and with two sons in the laundry business, Benson is among the minority of coin laundry operators (and small-business owners, in general) that is actually looking ahead to the second generation of family ownership – while at the same time planning to expand his business with a second store.

“Once you reach a certain age, anybody considering financing you will want to make sure your business isn’t something that’s going to go into limbo, with three or four people fighting over it,” Benson explained. “They want to make sure there is a specific plan in place so that there is an orderly transition and their checks keep coming.

“Also, the same confusion they’re concerned about is the confusion you should be concerned about,” he continued. “After all, you don’t want your spouse, for example, to be left in a position where she is dependent on other people. So, you want it laid out very clearly how it’s going to go and who is going to do what.”

For Tom Rhodes, who is a second-generation laundry owner, the process can be cathartic for a family that’s in business together.

“It forces you to talk about issues,” explained Rhodes, who operates eight Sunshine Laundry Centers in and around Vero Beach, Fla. “In families, often things should be said in a business setting but are left unsaid for a variety of relationship reasons. However, when you actually want to nail down a succession plan, it’s going to require talking through some issues that might be a little uncomfortable for some of the siblings and parents involved. That’s probably the number-one reason why people don’t nail down a succession plan.”

Owners should begin planning while they are still healthy and active in their enterprises.

“If you wait until after you’re 65, you can’t do many of the jobs associated with succession planning, such as teaching, explaining how the business operates, and passing on the spirit and vision with which it was founded,” noted Dr. Michael Sales, co-founder of The Family Business Resource Center in Newton, Mass.

The time to plan is between the ages of 55 and 65, many experts advised. And the handing over of the baton – the plan itself – should be a process, rather than a single event. Some succession consultants recommend a three- to five-year plan, while others advocate five to 10 years. Some even recommend 10 to 15 years. However, they all agree that the more time allotted for planning, the better the outcome will be.

Plan Ahead

Begin by writing down your thoughts about when you want to step away from the daily operations of the coin laundry business. Would you like to spend more time with your spouse? What do you want to accomplish over the next 15 years and how much money do you need? What personal goals could you achieve if you weren’t running the laundry and what would success in a new endeavor mean to you?

Next, discuss your ideas about the future with your family, store managers and other key employees. Decide how long you want to remain active in the business and in what capacity. If you see retirement as an opportunity to travel, be sure to include that in your discussion, as well as where you want to live and what role, if any, you want to play in your community.

At the same time, think about the long-term stability of the business. Most corporations and partnership business agreements spell out what will happen in terms of assets or the buying out of the company by remaining principals or partners if one of the owners or principals retires, dies or becomes disabled. But sole proprietorships often operate without such a legal blueprint, almost as if the owner is immortal.

“Compensation and stock ownership are key areas that need to be covered,” Rhodes said. “How is the total transfer of ownership going to happen? What’s going to work out well for Mom and Dad, and will that also work for the child?”

Typically, there isn’t enough cash in the business for the second generation to pay off the first generation, according to Rhodes. For the most part, there’s not enough cash flow to compensate the parents if they sell the business.

“They need a certain level of income,” he said. “This is their retirement, the nest egg they were counting on. So, as much as they want to be generous toward their child, they also understand their own needs. If I sell this business one day when I’m ready to get out, that’s the money I’m going to have to live on when I retire. That’s the number they have in their minds when they want to sell.

“It can get a little dicey sometimes, and as a family at times, we probably weren’t quite as in depth as we needed to be. But came to terms a while ago with how we were going to go forward with succession.”

Once you’ve established these parameters, begin revising your business plan – assuming you already have one. If not, write one now.

The most effective business plans are prepared by owners in conjunction with their successors. This should include any future plans for expansion, growth or new investment, as well as an honest assessment of a company’s current marketplace and competitive positioning. This joint business plan exercise will give you an opportunity to evaluate your successor’s goals and ideas for the firm, while forcing your successor to think through and write down specific plans for running the laundry operation.

As your successor is putting thoughts down on paper, recommended succession planning expert Mike Cohn in his book, “Passing the Torch,” you as the current owner should develop a business transfer plan. In it, identify certain “trigger dates,” including when:

• You want to begin transferring ownership to others.

• Control is shifted.

• The balance is transferred.

• Responsibility for day-to-day operations rests with your successor.

• You plan to formally retire.

This timeline also will help you to determine the length of time you have available to train your successor, Cohn added.

A Family Affair

The head of a company has no greater responsibility than identifying a successor who will be equally or more successful in running the operation, explained John Ward, a professor of Loyola University’s graduate business school. Said the specialist in family-business issues, “It’s Job Number One of a good leader.”

More often than not, the head of a family-owned operation chooses a son or daughter as successor. However, it’s not unusual for an owner to have more than one child competent enough to step into the parent’s shoes, making the selection process more difficult. Some owners decide to divide up the functions, giving each child equal responsibility. Of course, that, too, has its obvious problems.

Moreover, if the venture is passed on to the third generation, the number of potential successors will grow, thus exponentially increasing the chances for conflict.

“It’s a dilemma,” Benson said. “You have to step back and step away from everybody in the process. Everybody has a preference for how you do it. You just have to find a way of doing it in such a way that all of the interests are represented. In my situation, most of my wealth is wrapped up in the business, so you have to protect that first. There is no getting around it. You’ve got to do what’s best for the business, and that may mean a hard decision that nobody in your family likes.

“You may decide that the best thing to do is sell the business,” he added. “I knew a woman who owned a local restaurant. She died about two years ago at 81, and her will basically said, ‘Upon my death, please close the restaurant because I don’t think anybody else here is capable of running it.'”

Because of the different personalities involved, it can be awkward to talk about topics that have never been discussed before, according to Rhodes.

“All of a sudden, your adult child wants to take over your business,” he explained. “I was raising you not that long ago, and now you want to take over and tell me how the business should be run?”

In fact, the Rhodes family called upon a trusted family friend to act as a mediator in their succession planning process.

“He wasn’t a professional, but he had been down this road before with his own children,” Rhodes said. “We never held a group meeting, but I met with him for a while, and he was able to gauge my competency. He knew me when I was ‘young Tom’ and his son would drive me to school. He was impressed enough with my competency to tell my parents not to worry about me mismanaging the company. He was able to help us come to terms on what he thought was an equitable arrangement for all parties.”

Without an unbiased outside voice, the process can be completely subjective. Everyone approaches it with their own biases, Rhodes said; one generation has different hot button items than the other.

“My parents are thinking retirement, and I’m thinking income,” he explained.

When it comes to his 18-store laundromat chain in South Carolina, Brinkley has been grooming his two sons to step into the family business for years.

“It’s like lion cubs that learn to hunt by challenging each other,” said Brinkley, who took over the business from his dad. “My father and I didn’t agree on a lot of things in business. But, at the end of the day, he’d say, ‘So, are you coming over for dinner?’ And I’d say, ‘Fine.’ And we’d leave business at the store.

“Now, my sons have to deal with me, which is part of it, and they realize it. They challenge me every day. And I, through my upbringing, understand that challenging me is honing them to challenge a competitor. If they’re not strong against me, how will they do against real competition?”

Whether you choose one or more family members to take over, Ward suggested a grooming timetable to increase the chances for a smooth and ultimately successful transition.

“Your son or daughter should spend the first five years after graduation working outside the company,” he advised. “The next five years should be spent working in the firm, getting the best job experience you can provide. Teach them about the business but make no commitments in terms of an eventual leadership position.

“After they’re 30, concentrate on grooming them. Begin to prepare them to become a leader so that by the time they reach 35, they are ready to take over a lot of the responsibilities. By then, you’ll know if they are qualified and whether the process is working. Once they’ve reached 40, you will have ideally weaned yourself from the business and retired, leaving your successor or successors totally in charge.”

Keep in mind that when deciding on a successor, the issue of family versus competency must be weighed. In situations where children may be too young and inexperienced to take over at the necessary time, it may be best to move a seasoned manager into the top spot. Often, when decisions are made strictly on nepotism, key personnel who have helped build the business leave altogether, and the entire organization suffers.

“If there is no competence, there’s no sense in having the conversation,” Rhodes said. “As much as a parent may think their kid is the greatest thing that walked the earth, the kid just may not have the competency, and frankly business may not fit into that child’s area of giftedness. And that adult child may not even realize it yet.

“They may see Mom and Dad’s lifestyle and think it’s pretty cool. But it’s a square-peg-round-hole scenario. As laundry owners, we’re all somewhat similar. We all have an entrepreneurial bent. We don’t mind being self-employed, and taking some of the knocks that go along with it. We’re all somewhat operationally oriented. And, frankly, there are kids that don’t have that bent.

“The laundromat business fits well with my personality. However, my sister wouldn’t do well at all in the laundry business. She has a different personality than I do.”

A Happy Ending

By planning today for the continuation of your self-service laundry business, you will help it succeed in the present and ensure its health long into the future.

“Few founders think about the future until it’s too late,” Danco said. “When they start a business in their early 30s, their whole effort is devoted to survival. But the survival instinct, so essential in the first few years, continues long past its usefulness. All of a sudden the owner finds himself turning 65. His kids are all grown, and he asks himself, ‘Where did the time go?'”

Rhodes suggested having an open conversation with all parties, including siblings that aren’t going to be involved in the business.

“Lay it all out there,” he said. “Don’t hold back. If you want to say something you’ve been thinking about for the last few years, say it. If you don’t get it out there, it’s going to come out eventually one day – somehow, someway and in probably not the most constructive fashion.”

He added that everyone must learn to get somewhat comfortable living with the inevitable tension that will always exist between the two generations.

“Dad’s ways may not be your ways, and there is always going to be tension, whether it’s in managing the business or in how much the second generation should get paid for their work,” Rhodes noted. “Parents are always going to think it’s too much, and the children aren’t going to think it’s enough. You just have to comfortable living with that tension, because it will never go away.

“Also, realize that both sides typically need each other. One generation needs the energy they don’t have any more and maybe some fresh ideas, but the other side needs the capital, which they don’t have yet.”

Keep in mind that succession planning is critical. If you have no plans to sell your business during your lifetime – or if you may sell in the future – you need to plan for the inevitable. To keep your coin laundry in the family, to keep it running smoothly, and to keep it running at all, you must plan ahead.

Don’t wait until it’s too late for your business to be passed on, because it may end up in the wrong hands.

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