Lewis Rudy
A few years ago, I read the results of a survey of local families and closely held businesses and their preparedness for transition and succession. 93% of respondents stated they didn’t have a succession plan, 73% had no strategic plan, and 95% didn’t have a documented revenue growth plan.
These businesses might be successful today, but they carry added risks without plans in place. If they decided to act today and begin the exit planning process, they might be in a better place in 3 to 5 years. They would clearly articulate their vision and begin identifying successors. They would work with their team of professional advisors to plan the ideal ownership transition for themselves and their successors.
But what happens if everything changes overnight before any of the plans are in place? I am admittedly biased toward being prepared and with good reason. You see, I’m one of those who unfortunately experienced everything changing overnight.
It was the fall of 1986 my father (59), and his business partner and cousin (43) approached me about joining the family business. They started the business in Montreal in 1977 and made it clear no family would be involved. I was the eldest of four combined siblings of the owners and well on my way in my young business career. Neither of the partners had considered succession planning prior to 1986, but my father felt it was time to given he was approaching 60 years of age.
After a few revisions to the operating agreement, I started in October 1986 at the age of 27. In the blink of an eye, everything changed. On January 15th, 1987, three months after I started my father’s 43-year-old partner died of a massive heart attack. To say the least, I wasn’t prepared for what would happen next.
My father was in shock. He would tell me several years later he felt paralyzed, and it showed. After a week of grieving, I found myself assuming the duties of my late cousin. At that time the business was small with 25 employees and just over $3m in annual sales. My father was responsible for product development as he had been for most of his career. My cousin was responsible for sales and manufacturing and there was a production manager.
Their operating agreement had a death clause stipulating the survivor would purchase the shares from the deceased’s estate at fair market value. Attorneys and Accountants engaged in the transition were surprised by how little planning existed. They had never done a valuation of the business since inception; they had decided years earlier to have a minimum of partnership insurance and most of it was to protect my mother in the event my father passed.
The valuation came back with an enterprise value of $5m and a pittance in insurance to cover it. Where would the money come from? As it turned out, the business would have 1 year and 12 equal installments to complete a $2m stock purchase.
In a matter of months, the business was in trouble. Using a combination of lines of credit, cash on hand, and small insurance, we couldn’t satisfy the debt. Our bank was happy to provide additional funds with the pledge of my parents’ home and personal guarantees.
I sure would have appreciated more than 3 months of training in running a business, but the reality was clear. I had no experience or training to run a business.
The on-the-job learning of managing a cash-strapped business and trying to replace the face of the company, without the market losing confidence that I had any capability of doing it, was a 24-7 battle. Adversity doesn’t build character, it exposes it. Fortune it for me, I came from a family that didn’t take things for granted and had a tireless work ethic.
Perhaps the silver lining if there was one, was not having any preconceived beliefs about how to run a business nor a mentor to guide me. Necessity is truly the mother of invention.
Between 1987 – 1989, I learned how to embrace change because it was constant. We lost money each of those years. Went through 3 banking relationships, while watching my parents put back most of what they had earned from the first 10 years in business. I have told people since, “I think I did everything I could to bankrupt the company, but my parents bailed me out every time.”
I was frustrated and angry with myself. Three years of 80-hour work weeks and I hadn’t figured out how to make money. How could that be? I was certain nobody was outworking me, and I was confident I was smart enough to turn this around.
I had my epiphany in late 1989 during the budgeting process for 1990 amidst another year of losses. I recognized I felt I was a victim of circumstances, which was a crutch. I challenged myself while budgeting to put a positive number on the bottom line. By asking, “What has to happen to achieve it”, I began questioning everything. It hit me that I was able to see what I expected, but I had left out the “how” to achieve it.
The choice was mine. I can run a business that is driven by circumstance, or I can take control and run it by design. Fortunately, I chose the latter, and I never looked back.
Change is hard. Not changing is even harder. Between 1990 -1999, the company grew from $3m to $25m in revenue. It went from a 25,000 sq. ft. facility and 25 employees to 250,000 Sq. Ft. through multiple expansions and 275 employees running two shifts.
By 1994 my parents not only received every dollar they reinvested, but they also participated in an ownership transition that provided for their retirement.
That same year a clear 5-year plan was developed to achieve the next goal of building a business that would put my 1994 business out of business, and it would be ready to transact without me staying on. I believed my business would have the most value when I had the least impact.
In 1999 the company was sold to the Louisville Bedding Co. My journey from Montreal to Louisville was completed when I became President of LBC.
In 2005 I needed my next challenge and Rudy & Associates was born. When I’m asked about my why, I share this story.
I never wanted anyone to go through what I did from 1986-89. A lack of planning for the unexpected almost had catastrophic implications for my family.
We have a choice. Circumstance or design?
