Boring Companies Should Get More Headlines

We Think Boring (Main Street) Businesses are Anything but Boring.

The vast majority of businesses in the US are main street companies. If you walk down the main street of any typical US city, you’ll recognize these companies. They’re the cafes, restaurants, and markets; retailers; trade service providers (plumbers, HVAC, and electricians, along with contractors); professional service providers (insurance brokers, health care providers, and financial service providers); and everything else in between.

If you go just outside many US cities, you’ll also find another group of main street companies (although not actually on main street). These are the manufacturers, distributors, and shipping companies.

What do all of these companies have in common?

You may have guessed it from this article’s title – these companies just don’t seem to get any press or news coverage.

But, they should. They’re the backbone of our economy and make up the vast majority of businesses in the US. They’re often owned by families or closely-knit groups, and are tightly managed. They need to be successful (and profitable) because their owners and key employees rely on the income generated from the companies to pay their bills. 

A lot of these companies can be surprisingly profitable for the owners, and, for those owners who are particularly generous, the companies’ employees. Speaking from personal experience, we’ve worked with dozens of main street company owners who, with little-to-no formal education, are quietly managing successful businesses and regularly taking home well in excess of six figures year after year. And, the biggest beneficiaries of that success are often those in the next generation (see below).

The Transition

Starting and building a profitable company should feel like a tremendous success. It’s like raising a happy, well-adjusted kid: it’s a constant stream of surprises, but somehow and sometimes things work out in the end.

Steadily profitable companies with older owners – we’re looking at you, baby boomers! – inevitably face the decision of what the next stage should be in the lifecycle of the company. At some point the aging owners will need to exit. And if the exit plan isn’t intentional, then it’s a surprise, and if it’s a surprise, those companies often sell at a big discount or simply disappear, which wipes out all the remaining value. It’s a sad ending, and we’ve seen it happen.

To avoid that outcome, the best way to prepare for an inevitable transition is to build a business succession plan. That means identifying the target sellers – whether outside or inside – deciding the target sale date, and cleaning up any loose ends (tax, legal, employment issues, etc.), well in advance.

The Next Generation

The best buyers are often inside the company. They’re the employees who the owners intentionally hired and trained with the expectation that they may be the ones who take over someday. They’re often brought in at relatively low salaries, work their way up, show initiative and leadership, and are eventually given more responsibility and control until it becomes clear that they are the company’s future.

We’ve seen numerous hourly wage employees work their way up and become wealthy after buying into main street companies. It’s honestly like watching people win lottery tickets, and it’s tremendously satisfying to experience, even from the outside.

But, again, these outcomes don’t happen overnight or unexpectedly. They’re very intentional once the planning is put in place. That planning includes factors like these:

• Targeting the right talented employees as early as possible. Those employees should be in the next generation.
• Training those employees over years and allowing them to show drive and leadership skills.
• Determining whether those employees have the desire and aptitude to take over and run the company someday.
• Eventually, as the years go by, and as the owners get older, offering the opportunity to buy-in, which typically means selling portions of equity, in installments, to the employee. For example, there may be a 5 year plan in place, under which the employee buys 20% each year for 5 successive years. Essential to this process is a robust and well-written shareholders’ agreement or operating agreement that allows the current owners to maintain control as long as possible, and in the worst case scenario, buy back any equity sold to the employee.

Timing is also critical

Employees rarely will have the funds on hand to pay for the equity, so they’ll need to finance it. In tougher economic times, that financing will be harder to secure, as banks will be less likely to lend, and when interest rates are high, employees may be less interested in taking on increased levels of debt.

The timing element goes back to the idea of planning. The best exit outcomes for aging business owners are often the best planned outcomes. Owners can’t exactly predict when a recession will happen, for instance, but as decades pass, they can get a good sense for the general economic trends, and so they can try to align their exit with positive economic market conditions.

So, if you own a successful main street business, start early and think often about your exit strategy.

And if you would like to discuss your EXIT STRATEGY with a member of our legal team – let us know, and we will be happy to help.