This is the second article in a series TCI Magazine will run in 2022 looking at exit and succession strategies for owners of tree care businesses. Part 1, “Demystifying Succession Planning: What’s Next for the Future of Your Business?” ran in the May 2022 issue.

In the first article of this series on exit strategies, the concept of generational wealth was briefly introduced. According to Experian, a multi-national consumer credit-reporting company, “Generational wealth is wealth that you accumulate and pass down to future generations.” A family business is one of several ways to build generational wealth.

According to the U.S. Census Bureau, approximately 90% of businesses in the country are family owned, ranging in size from single owners to multiple shareholders and even massive Fortune 500 companies. While a family-owned tree care company can have a valuation in the millions, most are considered small businesses by the U.S. Small Business Administration (SBA). The SBA defines a small business as an establishment with fewer than 500 employees, and an establishment is a single physical location at which business is conducted.

It is said that starting a business can feel similar to giving birth, and often, although not always, a business is the owner’s first “baby” before starting a family. Whether or not an owner starts a business intending to build generational wealth, they are poised to pass that wealth along via family succession. There are key things to consider when passing a business down to a family member.

Timing

Choosing the best successor is the owner’s most important role as a business leader. It is never too early to start thinking about succession planning. However, it can be too late. For example, when an owner passes away without a succession plan, the result can be devastating, not only to the family, but also to the business and its employees and clients.

For those owners who want to take some chips off the table, bringing on a family member in an operational or a general management role is an excellent first step. The benefits are multifaceted, including visible co-leadership that will lead to a transfer of ownership, offering time for the successor to learn the nuts and bolts of the business.

“Ours was a long and slow transition that happened organically over approximately 10 years,” says August Hoppe, owner of Hoppe Tree Service, an accredited, 22-year TCIA member company based in Milwaukee, Wisconsin. “I started working in the family business in 2001, and then my brother got involved. My father was very open to allowing us to try new things, so it wasn’t long before I started doing sales and estimating and then hiring employees. We were a three-person executive team making big decisions.”

Co-leadership also enables the owner to take on a less-demanding role, freeing them up to focus on the parts of the business they most enjoy. Hoppe elaborates, “We informally talked about succession for a number of years, but in 2013 we got serious about it. I stepped into the general-manager role while my father transitioned to working as a PHC applicator. This allowed him to stay on with reduced responsibility, but he was still present to counsel and give advice without the pressure of managing the day to day prior to moving into retirement.”

Interviews with tree care companies for this series uncovered other owners who transitioned into consulting, sales and other roles, as opposed to going straight into retirement.

“My brothers and I bought out our father, Steve Sr., and each of us is 25% owner, but Senior will probably be around forever,” says Steven R. Mays, Jr., current president of Carroll Tree Service, an accredited, 44-year TCIA member company based in Owings Mills, Maryland. “He has taken on a new role doing QC (quality control), assisting crews, working with training crews, moving trucks and helping with the day to day, because he likes to be around. We joke that my dad is the most overpaid truck driver in the world.”

Structure

Getting the right processes and best practices in place will help the business build a solid foundation for the day-to-day operations while supporting the future of the business. While this can be done independently, TCIA Accreditation is a program designed to help tree care companies do this.

According to tcia.org, Accreditation is a business-growth program that gives tree care companies the tools to strengthen the foundation of their businesses and construct a successful future. Accreditation is designed to help owners build documented safety and training programs, establish policies to help employees perform better, evaluate the company against industry standards, develop customer-satisfaction practices and get ahead of the competition for municipal-bid contracts.

“The real value in Accreditation is how it prepares a company to operate well and get itself organized,” says Bob Rouse, senior vice president of programs and services for TCIA. “This can then parlay into better recruitment of employees and also being prepared for company succession, whether it is internal/family succession or external/business-sale succession.”

TCIA Accreditation also can support the future generation of ownership by essentially creating a manual for business operations. “It’s a huge head start in transferring ownership to a family member when a tree care company is already running the business based on best practices, versus trying to transfer a company that’s all over the board,” says Rick Shepard, CTSP and founder of Live Oak Consulting. Shepard is also a TCIA Accreditation auditor.

“That documentation of best practices is important. It can be used as a template for how to run the business for the future generation by clarifying the ‘shalls’ versus the ‘shoulds.’” Shepard explains: “‘Shalls’ are red lights. These are non-negotiables. ‘Shoulds,’ on the other hand, are yellow lights. You can move around them with caution.”

“It was never part of the plan to turn the business over to a family member. I ran and grew the business to have a good value at the end, figuring I would sell to another company. But my son, David, showed a passion for the industry and the business,” says Thomas J. Golon, president of Wonderland Tree Care, an accredited, 38-year TCIA member company based in Oyster Bay, New York, and a former chair of TCIA’s Board of Directors. “We have really good processes, financials, training and people. We also have an amazing management team that can perpetuate this company. I could walk away today and feel confident.”

Valuation

Any owner would expect to get fair market value for the business they built. However, it’s important to note that a longer period of co-leadership can result in business growth that must be considered when structuring the sale. When a family member is preparing to take over the business, it can be tricky to settle on a number that is fair for both parties.

“We had to consider the equity of my parents’ co-ownership to settle on a number that valued their work over the years but didn’t inflate the price without considering the growth we experienced in that 10-year period of working as a team,” states Hoppe.

Getting very clear on the fringe benefits the previous owner enjoyed, and whether those can or will continue under new ownership, is also important. This could include costs covered by the business, such as mortgage or rent, utilities and vehicles, among others. “The fringe benefits were the thing that surprised us the most. Our parents ran the business out of their house, so there were expenses the business paid for that we had to navigate during and after the sale,” says Hoppe.

Relationships

Naturally, family relationships are important to manage. However, equally important relationships to manage during the sale of a business are those with your staff – especially long-time staff. “Get your management team involved as soon as family succession is on the table, so they understand the future of the company,” suggests Shepard. “These people might feel they have some skin in the game, because they’ve been around a while and helped get your business to the top.”

When selling the business to trusted employees comes off the table, regardless of whether it was ever discussed, it can hurt the relationship, especially if the transition to family comes as a surprise to employees. Building that co-leadership opportunity with the successor not only offers visibility into what the future could look like, it also opens doors for everyone involved to learn how to work together and feel secure about the transition once it happens.

Chip Sandborn, CTSP, Certified Arborist and president of Sandborn Tree Service, a 31-year TCIA member company based in Sebastopol, California, brought daughter Mariah Sandborn, CTSP, into the business in 2010 in a temporary, part-time capacity that grew to full-time office manager. Today she is operations manager, and they’re working together on next steps for her to take over the business.

“Our office staff and crew leads have been informed, and my dad has been dropping hints about his eventual retirement at safety meetings for years. It’s hard for the team to imagine Chip not being here,” says the younger Sandborn. “We don’t want it to be scary, we want them to feel confident in the future. We’ve begun talking about a vision that we’ve built for the company moving forward.”

As an owner looking to transition into a reduced role or move directly into retirement, it’s also important to consider client relationships. Many consumers like to “shop local,” and will give their business to a local company with a great reputation and a commitment to quality, both of which contribute to the legacy of the family name. However, a change in leadership can be an unwelcome surprise for clients.

“A challenge I’ve been working through is that I maintain many large, long-time clients, and to walk away and leave that with someone else is difficult,” says Golon. “We’re working on processes to support that. David is taking over many of my accounts, and we have someone else who has been shadowing me, preparing to take a big piece as well.”

Communication

Management challenges can stem from poor communication, the overlap of family and business issues and a lack of clarity for the future. Clear and open communication is key to navigating these challenges, but it’s not always easy.

“Family business is tough. It’s easy to start, but it’s not easy to transition. Statistics have shown the success rate of transition is horrendous, with approximately 85% of businesses failing at their third transition. We are on our fourth transition over the company’s 72 years in business. So much of that has to do with entitlement,” says Mays, Jr. “We took the personal part out of it and put the company first. That transparency, with open discussion on what each person is thinking, being professional and being direct, has kept relationships close. We get along well at work and see each other outside of work and on holidays. It’s something we have to actively work on every single day.”

Much like any other relationship, personal or professional, great communication takes work, and sometimes a little extra support. “My dad’s a really quiet guy, so the biggest surprise during our parallel leadership has been that he assumes I know everything he knows,” says Sandborn. “He has so much wisdom and experience, but unpacking that and tying it to teachable moments for me has been a challenge. This is one area where working with a consultant has helped me learn which questions to ask Dad so he can walk me through the decision-making processes that have for so long been internal and second nature for him.”

Advisors

There are many different ways to structure the buyout plan, but the only wrong way to do it is to not consider both parties’ needs and goals for the immediate and long term. Working closely with professional advisors will go a long way in ensuring that both parties are happy with the transition and eventual outcome.

At a minimum, expect to work with a CPA and an attorney. “Keeping your CPA in the loop on what’s going on helps them do their best to prepare your taxes when that part comes around. The tax implication isn’t as bad as you may think, because the tax rate selling a business isn’t the same as earned income,” says Shepard. Professionals are able to help owners and successors structure the buyout plan to reduce tax liability to best benefit both parties. “You’ll need an attorney to draft the buyout plan and negotiate with the buyer’s attorney to get the deal to the finish line. If you’re going to use the same counsel, you’ll likely save some money. However, in some cases, the buying family member might feel like they need their own counsel.”

Transition firms offer a suite of services led by experts to help each step of the way during the transaction. “Our clients expect the best from us, so we paid a premium and used a business-transition firm to support us through our second transition,” says Mays, Jr. “The firm we used was referred to us by a long-time client, a landscaping firm that went through a similar transition. It gave us a lot of tools and outlooks we needed. The mediator on the team is an attorney focused on business transitions.” Mays, Jr., notes that the mediator regularly preached openness and communication throughout the transaction.

When the owner is ready to start thinking about the future but isn’t quite ready to take the leap, a business consultant can help sort through what the future can look like and help plan next steps. “Having more information is essential. A good business advisor can walk you through the process. You’ll get the most bang for your buck having a team of people on your side,” says Shepard.

Takeaways

Start thinking about and discussing your succession plan early. Build a period of co-leadership to onboard the successor and prepare the team for a future without the owner they’ve always known. Involve the management team early on, and leverage them to assist the rest of the team with the transition. Be open to transparent communication with family, employees and clients. Connect with others in the industry who have gone through the process. Finally, hire professionals to guide the leadership team through unexpected challenges, structural planning and the actual transition in leadership.

Emily W. Duane is a freelance writer specializing in business and marketing topics for the outdoor trades and recreation industries. She is currently based in Denver, Colorado.