For over 30 years Carcass Refurbishing, Inc. built a reputation for excellence and innovation.
Right out of college Ivauntah Carcass saw a need and started rebuilding and improving used medical devices. She now sells refurbished medical equipment all over the world.
The company has 17 employees including Iva’s daughter, Scarlet.
Scarlet Carcass has been working in the shop all through her school years and now at 60 Iva would like her to take over the company.
Internal Succession Review, Business Valuation, and Business Succession Plan
We were referred to Carcass by another Client and Iva retained us to do an internal succession analysis with valuation and to design a business succession plan.
For the analysis, we helped Iva and Scarlet fill out a multi-page questionnaire and stacked up a mound of financials, Tax Returns, Customer Lists, Leases and more.
The Valuation we perform identifies the current market value and financeability based on the current operating structure. Then, case by case, Transaction Scenarios are applied that impact +/- cash flow.
Scenarios could be: Iva phases out while retaining a Management Salary and Scarlet elevates to a much higher Management Salary. Or Scarlet is awarded ownership in lieu of Salary/Bonus. Or a family discount is applied. The scenarios are inclusive of TAX issues, ongoing medical insurance and financial planning for Iva’s retirement.
We also create a scenario that would apply to a Third-Party/Outside Buyer with full funding or financing. More on that later.
The Analysis, including Valuation, took several weeks.
This succession like many, is a retirement plan and as such the focus is on determining if the business can support Ivauntah’s retirement with minimal risk to her.
In addition to analyzing and valuing the company we provided a Viability Opinion on the continued growth under Scarlet’s management.
The Viability Opinion is a critical factor.
Does the Successor meet the requirements to succeed?
Most successions or internal sales are structured as “Seller Financed” with little or no cash up front.
Some are Bank or Bank/SBA financed but the Seller may still be subordinating to the Bank. Risk can be very high. Failure rate for 2nd generation successions is over 65%.
So, with that in mind; if Scarlet is not successful, Iva could spend her golden years as a doorway sleeper in Pioneer Square.
Re-Read the above about the 2nd generation failure rate…
Even though Scarlet Carcass worked her way through College at CR, Inc. Her degree path was in Poli-Sci and International Econ. Her Mom started with an engineering degree.
Scarlet was resigned to taking over the business but also wanted to pursue a teaching credential.
She had a very good grasp on explaining established processes such as procurement, production, distribution, staffing and logistics. And a good general feel for the administrative interface.
Employee interaction was positive and she appeared to be the “Go To” person for guidance and problem solving.
No sales background or sales management experience.
At best a minimal understanding of the accounting side of the business.
Not much interest in learning basic cost and control accounting.
Scarlet would be characterized as a proficient Operations Manager.
Could she be a proficient Owner Operator?
And the BIG ONE… Does she have fire in the belly?
Recall earlier on the page the stuff about Transaction Scenarios? The part about preparing a scenario for a Third-Party/Outside Buyer.
In our history about 8 out of 10 succession cases turn into a sale to an outside Buyer.
Family expectations of a succession can be a very emotional subject. Our role often changes us into counselors or true intermediaries between Mom/Dad, and Daughter/Son, or Owner and Key Employee, or Seller and Management Team.
Don’t assume a succession. Include it in your exit strategy planning but also allow for the probability that it may not be the right move.
Scarlet moved on to teaching and Ivaunta downsized by 2/3 to a more specialized focus with repeat customers. Profitability is the same. We will sell it in 2019.
Bill Pearsall
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