Northeast Ohio entrepreneurs learn to plan early to ensure succession

In 2003, Larry Fulton purchased a small business manufacturing wooden pallets in Middlefield and quickly moved the company to Cleveland. Even when Fulton founded the company that became LEFCO Worthington, an export crate and industrial packaging business, he already had plans to sell the company.

In April 2023, Fulton sold LEFCO Worthington to Evergreen Cooperatives. Evergreen Cooperatives is a Cleveland-based organization that is moving its business to an employee ownership model, where employees own stock in the company. Although Fulton’s intention was always to sell, he said he initially took time to understand the inner workings of the business.

“It took me five to seven years to get up to speed,” Fulton said. “I try to implement metrics and standard operating procedures as quickly as possible.”

Although Fulton does not have a specific succession plan for his current business, fiberglass manufacturer Hanlon Composites, he is quickly implementing a new electronic filing system and other upgrades to create value for future buyers. did.

“I look at businesses as assets,” Fulton said. “With any asset, you want to make sure it’s valued. It’s performing as it should.”

Making improvements will impact a company’s value before and during the succession process, but entrepreneurs considering an exit should give themselves several years to plan. Christopher McKenna, managing partner at investment banking firm Carlton McKenna in Cleveland, said this could include things like defining the customer base and putting a full management team in place.

“We will help businesses as much as we can because there are some things that can be fixed relatively quickly,” McKenna said. “The more time you have to plan your exit, the more you can work on and the higher your valuation.”

First, create a strategy

McKenna’s company deals with internal successions, where founders sell to family members or team members. External succession, on the other hand, involves a sale to an external party. For example, in a majority or minority recapitalization, investors provide capital in exchange for a portion of the business.

There are many issues that business owners need to consider when making a business succession, but McKenna said third-party advisors can guide entrepreneurs through long-term business succession.

“The thing to think about is where you want to be immediately after the deal,” McKenna said. “What kind of environment do I work in? What do I want my role to be? What do I want the company’s role to be? These are all non-financial types of questions, but strategic questions is.”

Carlton McKenna works with small and medium-sized businesses with annual revenues of $10 million to $250 million. Small businesses may not have the resources to identify areas for improvement, so addressing these issues through external advisors can make a company more attractive to investors, McKenna said. Ta.

“This is a big problem for buyers because it eliminates the need to discover and fix every weakness in a company,” McKenna said. “Help guide them with the breadcrumbs.”

Differentiation is another pricing factor, McKenna said, meaning entrepreneurs would be wise to identify what makes their company unique. Above all, owners need to be thoughtful about the exit process.

“A lot of people are going to be selling their businesses, so it needs to stand out as something very attractive and understandable,” he says. “Buyers can take advantage of your operational expertise and use it to their advantage. The easier it is for them, the better.”

Business owner Fulton said he immediately trusted Evergreen Cooperative during their first conversation. While the continued growth of the company is important, maintaining the health of the management team was a key factor in the final decision to sell.

“It was a combination of their values, their vision and their opinions on something as vitally important as culture,” Fulton said. “I wanted my team to be taken care of too. As leaders, we need to be good at communicating change and what it means for individuals on a daily basis.”

The importance of flexibility

Daniel Weiss, owner of Adatasol Software in Highland Heights, is in the midst of selling his custom software business to a CEO. Adatasol is the developer of Studio Suite, a cloud computing platform designed for media production environments. Plans to sell the company have been put on hold because a potential buyer has health issues, leaving Mr. Weiss wondering about his future and the company’s future.

“I knew where I was two years ago. Where am I today?” Weiss said. “You have to reevaluate that maybe you have to do this for another two years, but is that really a bad thing? That’s the question. You decide what your future life will be like.” But life isn’t so bad right now.”

A roller coaster year at Adatasol has been smoothed out by EO Cleveland, a branch of the global peer-to-peer network entrepreneurship organization based in a converted office building on Bolivar Street. Conversations with fellow founders gave Weiss clarity on next steps for his 12-employee shop. Not to mention thoughts on the wisdom he would pass on to his successors.

“What is their vision for continuing (the business) into the next generation?” Weiss said. “I’m selling my baby, which I’ve had for over 10 years. And I sell it to someone because I can see a vision for their future.”

Internal succession means maintaining a culture that values ​​work-life balance. At Weiss, our employees work completely remotely, with very few meetings scheduled during the week. Lawyers are assisting with the acquisition structure and additional legal formalities, and Mr. Weiss is keeping management updated.

For now, Weiss says he’s more concerned about the CEO’s safety than he is about future acquisitions. Yoga and an understanding family will help Weiss overcome the challenges of next year, he said.

“Knowing your values ​​is number one,” Weiss says. “For better or worse, I view business as personal. What I’ve built is personal and I hope my successor carries that on.” can change, so you have to be flexible.”