Flowing forward: Succession planning for business owners

For owners of water and wastewater services companies, building a successful business likely required years of technical training, relationship building, and careful management. Yet many overlook a crucial final step: planning for their eventual exit. As industry veterans approach retirement age, succession planning has become more critical than ever.

Some business owners are lucky enough to have children or key employees who are willing and capable to take over. However, the majority of owners must consider selling to, or partnering with, a third party. This article discusses how owners should evaluate three distinct succession options: selling to a competitor, working with a private equity firm, or partnering with a holding company.

Three primary succession options

Selling to a competitor represents the most natural of succession options. Competitors know the industry and bring technical knowledge and existing infrastructure to more seamlessly take over your operations. However, competitors may want to replace your brand with theirs - a key consideration for owners who have poured years of hard work into building their brand.

Private equity firms offer a different approach, bringing professional management expertise and capital to grow and modernize your company. They typically look to buy larger companies (with more than $25m of revenue), holding them for three to five years, making operational improvements, before selling them to another buyer. Many private equity firms prefer the owner to stay on working or to retain partial ownership for up to five years. As such, private equity buyers may not be the best fit for owners who are ready to fully retire and liquidate their ownership.

Holding companies represent an emerging and increasingly popular alternative, particularly appealing to owners who prioritize business continuity and legacy preservation. These entrepreneurial buyers differ from competitors and private equity firms in that they have principals who will personally take over the operations of your business. This gives owners the flexibility to retire on their own schedule - whether that be in 30 days or 3 years. Holding companies also place a greater focus on retaining existing management teams and preserving company culture. As such, holding company buyers may appeal to owners more concerned about their employees' and customers' future.

What factors should I consider when making my decision?

Owners should take into account five key factors when determining which succession path is best for them.

1. Time until full retirement

If you want to fully retire and exit the day-to-day as soon as possible, selling to a competitor or a Holding Company will likely be your best option. Private equity firms typically require

owners to stay on for a period of up to 5 years, while competitors and Holding Companies have executives ready to take on the operations from day one.

2. Size of your business

If your business generates more than $25m in revenue, all three options are a possibility for you. As such, you’ll likely be able to secure multiple offers from across the buyer universe and achieve a higher sale price. If your annual revenue is less than $25m, selling to a competitor or a Holding Company are more suitable options.

3. Cash needs & deal terms

Private equity firms typically have the most restrictive deal terms, requiring you to roll over your equity in the transaction. Selling to a competitor or a Holding Company could allow you to receive 100% of the proceeds in cash as soon as the transaction takes place. Consider your need for liquidity and your desire to roll over equity before choosing which path to take.

4. Future of employees

If ensuring the security of your employees’ jobs is of paramount importance to you, consider selling to a competitor or Holding Company. Both buyers typically place a greater emphasis on culture and retaining and training employees. On the other hand, some private equity firms pursue cost-cutting measures after buying companies, putting employees’ jobs at risk.

5. Vision for your brand and legacy

If your brand is something you’re extremely proud of and wouldn’t want to see go away, selling to a competitor is likely not the most suitable option. Private equity firms and Holding Companies are more likely to allow your brand to live on after acquisition.

Who should I talk to help me make this decision?

If you decide the time is right to start succession planning, we recommend seeking advice from former owners who’ve sold their businesses, local business brokers, your accountant, or a business attorney. Additionally, meeting with a range of potential buyers can give you more of an informed perspective before jumping into a transaction. We at Route Two Partners are also happy to help answer any questions you may have as you’re thinking about succession planning.