SEATTLE, WA – At 65, Charlie Lanasa has long grappled with how best to retire from BestWorth Rommel Inc., the Arlington-based sheet metal fabricator he acquired nearly two decades ago.
After putting in 70-hour weeks for the company, which makes gas station canopies and custom siding for clients such as Krispy Kreme and Porsche Bellevue, he wasn’t sure he could let go. And, a couple of years back, he began to have another concern: “I started thinking, ‘What happens if I get hit by a truck?’” LaNasa says. “It would violate all my principles.”
LaNasa has always taken pride in operating the business by three principles: Act ethically, provide good stewardship of the firm’s assets, and take care of his employees, customers, vendors and subcontractors.
How could he find a new owner who shared his values and who would keep the business in Arlington and provide security for his 100 employees in a community of 19,000?
LaNasa’s dilemma is one shared by many among the nation’s growing population of aging business owners.
Project Equity, a Bay Area nonprofit, estimates baby boomers born between 1946 and 1964 own 2.34 million businesses across the country and have nearly 25 million workers on their payrolls. In 2017, owners 65 years or older accounted for 36 percent of all small businesses with annual revenue between $100,000 and $10 million, and 45 percent of midsize businesses with yearly revenue between $10 million and $100 million, according to Minneapolis-based Barlow Research Associates.
In a 2015 U.S. Census Bureau survey of Washington state’s 183,000 employers, roughly half of the business owners who responded were 55 or older. Accountants and business brokers estimate that well over half of those businesses will change hands during the next 10 to 15 years in what they refer to as a “silver tsunami” of ownership transition. These boomer businesses represent a considerable opportunity for potential buyers, including family businesses wanting to diversify their holdings, employee stock ownership plans, private equity firms and, increasingly, millennials eager to run their own businesses.
Many local companies have established new businesses in the hope of tapping the massive opportunities involved in helping owners skillfully navigate that wave of ownership transition. The opportunity to work with retiring baby boomers prompted the Bellevue-based financial consulting firm Berntson Porter & Co. to set up a new Corporate Advisory Group led by Pitt Means and Gregory Noone, who joined Berntson Porter from the investment banking firm Exvere.
Meanwhile, last fall, M&A advisors Mike Bennett and Leif Johnson formed Seattle-based Liberty Ridge Advisors to advise closely held midsize and larger businesses on the West Coast on exit planning and transactions
“There is a significant wave of baby boomers over the next 15 years that have terrific businesses and are aging out of these companies,” says Bennett.
Bizbuysell.com and Bizquest.com, which post sales of smaller businesses that typically sell for under $1 million, says its brokers have seen a steady increase in owners interested in selling in recent years, says Bob House, president of the online marketplaces. He adds more than half of the sellers are retiring baby boomers. One reason for the increase in sales in recent years, he notes, is that boomers who might have wanted to sell earlier had to wait until their businesses recovered from the recession.
But the coming wave of transitions also presents a significant challenge. Many businesses aren’t easy to sell. In some cases, their owners haven’t put in place the processes necessary to ease the transition to new ownership. Such companies could end up being liquidated, hurting employees and communities.
“One statistic that’s bandied around is that only one out of every three or four businesses that need to sell actually close with a transaction,” says David Odom, a partner in the Kirkland office of the Arizona-based consulting firm B2B CFO.
Even if a company does sell, there remains the risk that outside buyers will cut local jobs and roll operations into a bigger, outside entity. Rural areas, whose livelihoods often depend on a handful of small and midsize employers, could find themselves in a downward spiral of fewer jobs and fewer residents.
LaNasa’s concern about the impact on his employees of BestWorth Rommel’s sale was top of mind when Odom approached LaNasa on behalf of OneAccord Partners. Kirkland-based OneAccord buys, operates and sells privately held companies in the Northwest with the goal of helping them through the transition in a way that keeps firms in place.
“We walked into the first bay of the factory,” LaNasa says, “and Odom’s eyes got huge.” He wanted to know why the company was not four times its size.
That’s when La Nasa realized for the first time that he was limiting his employees by not selling. “They cannot grow in the company if I do not grow the revenue,” he recalls thinking.
LaNasa had a higher cash offer from another suitor, but chose to sell to OneAccord in February 2017 because of OneAccord’s commitment to keeping the company in Arlington, as well as for its operations expertise.
“There is enough capital out there,” says Jeff Rogers, CEO of OneAccord. “The shortage is in people who can operate a business.” OneAccord, which has a team of 15 to 20 former CEOs to draw from, installed Mike Eskridge, a U.S. Army veteran with extensive manufacturing experience, as president of BestWorth Rommel. Eskridge plans to hire new employees and expand into new markets. LaNasa agreed to stay for a year to help with the transition.
KEEPING IT IN HOUSE. Bill Dodson, left, has decided to sell the general contracting firm DP Incorporated to five of his key managers over a five-year period. They are, from left, Jim Pirie, Quinn Anderson, Trygve Oye, Brian Whinihan and Eric Brock.
Unlike tech companies that tend to be venture backed and are organized from the beginning to think about an exit through an IPO or a sale to a larger company, small businesses are seldom prepared for a transition.
OneAccord’s goal, Rogers explains, is to hold a company for 10 to 12 years to make it sustainable, then either sell it to another company, to the employees, or to recapitalize the company and continue to operate it.
“It’s about the long term,” he insists. “It’s not about cutting costs and prettying it up.”
OneAccord currently owns three companies and plans to acquire three more in the next two years. It is raising a fund that would allow it to buy six more companies.
Many of the businesses in Washington looking to sell are family owned. The Northwest has a higher number of family businesses than many other parts of the country partly because, historically, there’s been a lack of capital compared to other regions, says Michael Butler, CEO of Seattle-based investment bank Cascadia Capital.
Family firms typically will consider a sale when the managing family member chooses to retire and there is no clear successor. Handling such sales can be complicated, says Christian Schiller, managing director at Cascadia Capital. It’s important to understand family dynamics before selling a business, he adds, and it take years rather than months to get to know family members and what they value.
Frequently, families will choose, as part of the sales transaction, to set aside money for the sake of their community. Schiller points out, for example, that when Gary Rubens sold ATG Stores, his online lighting business, to Lowe’s some years back, he donated $25 million to the Washington State Opportunity Scholarship program to provide financial support to help students from low- and middle-income households attain degrees in STEM fields.
“One reason I love this region is that most often the family makes a community-oriented decision,” says Butler. “They will leave money on the table to do right by their employees and community.”
In recent years, one type of buyer has shown particularly strong interest in family-owned businesses: companies representing wealthy families in the Northwest and outside the region. In part, there’s an appeal to the notion of wealthier family businesses investing in smaller family businesses. Both seller and buyer understand what it’s like to run a family firm. And they share values about the importance of employees and community.
Unlike a private equity fund that must return capital to its investors within a certain time frame, often five years or fewer, a family business can hold an acquisition as long as it wants. Buying profitable private businesses to grow them also helps a wealthy family diversify its holdings.
Stan McCammon, CEO of Seattle’s Joshua Green Corporation, has developed a Warren Buffett-style strategy of acquiring and holding on to promising companies with good revenue streams and healthy profits on behalf of the Green family.
“Generational transfer is a valuable place to look for companies,” McCammon acknowledges. “There are a lot of young people who have no interest in going into the family business, so this will continue to be a fertile area of opportunity for people who want to buy businesses.”
He says family owners looking to retire have been the impetus for many of his acquisitions, including Pacific Market International, a maker of beverage and food containers, and Cuizina Food Co., a maker of all-natural soups and sauces.
“One of the first things we tell [owners] is that we like to partner with them,” says McCammon. “They can sell part of the business and we can learn alongside them. If they want to exit, fine. If not, fine.”
That scenario is particularly attractive to business owners who care about what happens to their companies after they retire. Don Green, the founder of Sage Corporation, a Bainbridge-based maker of fly-fishing equipment, sold the company to Joshua Green (no relation) rather than other suitors, says McCammon, because “he wanted the business to land with someone who would respect the legacy of the company and stay on Bainbridge.”
Smaller companies that don’t have established processes or are in more competitive sectors need to look at other alternatives. Bill Dodson, who started DP Incorporated general contractors when he was 30, for example, found himself a few years ago with an itch to travel. He began researching how to transition the company, a Seattle-based commercial tenant improvements contractor, to new ownership. He talked to several business brokers and read books.
Dodson realized he would have trouble finding a suitable buyer because there was a low barrier to entry in the business. Furthermore, he says, “I would not feel comfortable selling the business out from under the people who have worked with me for a long time, who have invested their lives with me.”
Now, at 59, Dodson has decided to sell to five key staffers over a five-year period. He asked the managers to put their own money into the deal. “I had to make sure they all had skin in the game to show their level of commitment,” he says. Some of the new owners had to take out second mortgages to make the payment. “It is a five-year transition of ownership so it is important that in the long haul they had something to lose if they walked away,” says Dodson.
But the growth of nonbank debt funds, which can make a good return investing in a transitioning company, provide another source of financing for management buyouts. They allow the seller to get paid for his or her stake right away without necessarily requiring managers to borrow heavily to cover the cost.
While pleased to pass the company he founded to his managers, Dodson has found letting go a challenge. He no longer attends all the weekly meetings. “I tend to hijack the meeting if I’m in there,” he admits. Instead, he has weekly meetings with the company president. He also travels extensively and says, “My dog is overwalked and my yard has no weeds in it.”
How well such transitions succeed will determine not only the post-retirement comfort of many boomers, but also the future of millions of their employees and perhaps even the health of the communities they serve.
Joshua Green, OneAccord and Cascadia Capital look for companies that are attractive on the basis of earnings and revenues and have solid management in place. With so many strong buyers, there has been enough demand to support high valuations and still allow the buyers to be responsive to the sellers’ needs.
Companies today are trading at an average multiple of 2.3 times their cash flow. Many of the buyers are younger boomers who, disenchanted by corporate jobs, want to be their own boss, build equity in a company and then sell it later to retire on the proceeds.
Liberty Ridge Advisors’ Bennett expects the strong market for purchasing boomer businesses to last for the next 18 months to two years. He believes the changes in the tax code will have a positive impact on valuations. “It’s still a very strong sellers’ market. There is a lot of money out there looking to buy businesses,” Bennett says. Washington’s aerospace companies, for example, have attracted strong interest from foreign buyers.
A lack of clarity on what would happen with the tax code tapped the brakes on some transactions last year, but there’s been a sharp increase in companies seeking transition advice this year, says Butler of Cascadia Capital.
But many believe the sellers’ market for businesses will not continue for long. “Prices are very high and we don’t know how long the bull market will run,” says Butler. “If [owners] do not sell this cycle, it could be another five years before they get the chance again.”
Beyond economic cycles, there is the issue of the ultimate biological clock. At some point, aging baby boomers will no longer be able to delay retirement. If they end up rushing for the exit at the same time, there will be more sellers than buyers, leading to lower prices and the kind of consolidation that could hurt rural communities.
“It would not surprise me,” says Rogers, “that in 20 or more years we will have 15 percent to 20 percent fewer companies in the U.S. than we have today.” While there are a lot of startups, he adds, there are not nearly enough to offset the tidal wave of retiring boomer business owners.
“Many of these companies will disappear because they are too small or not operated well enough to buy, or they will sell to a strategic buyer and get rolled up,” says Rogers. “I think we will have fewer businesses operating independently in the smaller markets, which could then lead to fewer people living there.”
Marc Hayes, director of the Community & Economic Development Department in Arlington, where BestWorth Rommel is based, remains optimistic. While he acknowledges that roughly 60 percent of Arlington’s business owners are at or near retirement age, he expects buyers will be interested in Arlington’s boomer-owned aerospace and machining companies, for example.
Where the hit could come, Hayes says, is in businesses such as cabinetry or electrical repair that rely on workers in the skilled trades. Small towns and big cities alike “are in for a rude awakening over the next 10 to 15 years with millennials not going into the trades,” Hayes explains. And, he adds, millennials appear less willing to take over the family business than prior generations.
“If I were a millennial, I’d really be checking out the marketplace because an existing business just makes great business sense,” Hayes says. “All the licensing is in place already and typically they have all the equipment.”
Arlington and nearby Marysville have taken steps to strengthen their positions by applying for state certification as a joint manufacturing industrial center. Arlington also is seeing rapid growth in a new industry: recreational cannabis production. Those new companies could ease the pain of potentially losing some trades-based businesses as boomers retire.
But towns like Arlington are outliers. Most small, rural communities in Washington do not have the benefit of proximity to a major employer such as Boeing or access to a new growing industry like cannabis. They could be hard-pressed to retain their local businesses as boomers retire and may need to find companies like OneAccord willing to work with their local businesses to assure smooth transitions in ownership.
As for Charlie LaNasa? Under new management, his former employees at BestWorth Rommel are all still working and the company is in growth mode, and that makes him happy.
But he’s still adjusting to retirement. “The [past] year has allowed me to go through BestWorth withdrawal,” says LaNasa. He’s cut back to working three days a week, but still arrives at 5:30 a.m. to make a pot of coffee and take it out to the employees on the factory floor.
Letting go wasn’t easy. The new owner changed the company logo and altered its color from blue to green. “Did it matter? No,” says LaNasa. “Does it bother me? Yes.”
“But it’s not your company anymore,” he adds. “You can’t hold the dove too tightly. It’s got to fly away.”
Selling a business? Here’s some advice.
The more organized and prepared you are to transition your company to new ownership, the greater the likelihood you will be able to find a buyer.
– Buyers will avoid a company that is too dependent on its owner or on a small group of customers. Put processes in place to reduce that dependence.
– Prepare for new ownership. Your child “might have the DNA to be a successor but not the MBA needed to be a successor,” says David Odom of B2B CFO.
– Look for advisers to help structure the sale so you get what you want from the deal.
– Avoid making a large capital investment right before selling your company because “the business has incurred the cost of expansion but has not seen the benefit yet and they might not get credit for it,” says Berntson Porter’s Pitt Means. “That can be a sticking point in the negotiation.”
– Avoid changes in the business model or management team in advance of a sale. Buyers want to feel comfortable in the continuity of the business so changes might call that continuity into question. And that, Means says, “may force a pushback to demonstrate those decisions are working.”
– Don’t expect to put up your feet and relax as soon as you’ve sold your business. Many buyers will want you to stick around for a year or two to help with the transition.
– Build a team of advisers to help you prepare several years before you plan to retire. That allows time to strengthen your management so you can get a good price and your firm will thrive after you retire. Even if you later change your mind, the exercise of preparing for a sale will help you to improve your business so you will get more when you finally do sell.