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Even though he was in his 70s, longtime commercial real estate professional John Flake had not really considered what would happen at his company after he retired.
“I was feeling so good, in such good health, we weren’t really thinking about it,” he said.
That changed in February 2019, when he was diagnosed with constrictive pericarditis, a life-threatening condition that affects the outer lining of the heart. He underwent open-heart surgery and spent 14 days in the intensive care unit.
“It took me almost a year to recover,” he said. “Well, I made my mind up after that — I’ve got to get my daughter more involved in things because my wife had her own business and does her own things, so I needed Jessica to do it.”
Jessica Flake Dearnley, his daughter, worked at the company, which was then called Flake & Kelley Commercial. A chartered financial analyst, chartered alternative investment analyst and certified public accountant with three master’s degrees who has worked in commercial real estate since 2006, Dearnley had the skills but no path to ownership.
An existing buy-sell agreement penned long before Dearnley arrived at the business precluded her from taking her father’s position as owner, she said, so, in 2020, they decided to leave and form a new company with a long history — Flake & Co.
Her father founded his company with the same name in 1979.
“In commercial real estate, when you start out on your own, you have nothing, so I literally started with nothing,” Dearnley said. “I think that’s what a lot of people don’t understand is they think we’re a bigger company or that I have a predecessor company and I had existing employees, but we are a startup from the ground up.”
Although Flake said it is a good idea to start succession planning early rather than waiting until a health scare forces the issue, Dearney said she does not have an exit strategy thought out yet. After all, she is still in startup mode.
“I do actually have a lot that I should be planning,” she said, “but I still feel like we’re in the growth stage of the graph.”
Succession planning is underway at Meridian Investment Advisors in Little Rock, where Marshall Moon, son of managing principal Pat Moon, was made partner last year. Pat said he has no plans to retire anytime soon, but he is ready to focus on what he enjoys most — serving clients.
“There’s a lot of compliance required in the financial services industry, and that takes a lot of time,” he said. “Managing people from day to day, that takes time … so I’m looking forward to them having the opportunity to do those things and maybe me do less of it.”
Marshall said the transition has been going smoothly thanks to his father’s forward-thinking leadership.
“It’s common that something like this gets kicked down the road until somebody’s hand is forced,” he said, “but I give Dad a lot of credit in kind of being proactive and pushing the issue forward.”
Pat added that he believes Marshall, who has worked at the firm 10 years, will help make wealth management services accessible to younger generations. As the company works to add more partners who are in their 30s, providing a path to ownership can be a powerful recruiting tool, he added.
“We’re viewing the succession plan as one that can entice really talented individuals, Marshall and others his age or younger, because people who come into a closely held business like this are people that understand the risk associated with owning your own business and also maybe the opportunities professionally and financially too,” he said. “It takes a different mindset.”
Cal McCastlain, partner at Wright Lindsey Jennings, said succession planning — especially successful succession planning — is the exception, not the rule.
“Think about the scenarios and all the factors that came together to grow that successful business,” he said. “The current factors and scenarios — market, technology, personnel — are going to be totally different, and so you’ve got to accept the difference in what it took and what enabled the patriarch or matriarch to grow the business and what’s to come, and do you have the right parts there? Most often, quite frankly, family businesses don’t have all the right parts to generate a succession plan, much less carry it out to fruition.”
Whether the sole owner at a mom-and-pop is planning for their golden years or a group of owners is preparing in case of an owner’s exit, it is important to have a well-thought-out plan in writing, he said. It is also important to ensure the right personnel are in place to keep the business going.
Cal Rose, partner at Wright Lindsey Jennings, said businesses left behind after an owner’s death can face uncertainty even if there is a child who is ready to take the reins, especially if other family members disagree about their fair share of the earnings.
“You just really need to have an honest evaluation within the family as to the players,” he said. “The parents should know their kids, and they should be able to hopefully navigate that, but you can’t ignore those things because you’re going to end up with problems.”
If selling the business proves to be the best option, it can be helpful to hire a business broker. Business brokers help owners determine what the business is worth, take the business to market, find the right buyer and negotiate the sale.
“It’s an involved process,” said Casey Grimes, market area president at CBI Team. “I think some people don’t realize just how many moving parts there are with a business, and we do it confidentially when we take a business to market because we don’t want everybody finding out it’s for sale — vendors and competition and that sort of thing. We have to do it confidentially, which is a lot more involved than, say, putting a sign up in front of a house or putting it up on the [multiple listing service].”
Shep Campbell, senior advisor at Merger & Acquisition in Little Rock, said confidentiality protects the operations at a business.
“I think a big part of human nature is the fear of uncertainty, and if an employee or employees hear that the business is for sale, the first instinct may be, ‘Well, they’re going to fire us all. We’ve got to go find another job,’” he said. “That’s not the case at all. In fact, part of what a buyer is buying is that process that the employees have established, and so the confidential nature protects the integrity of the business in that regard from an operational standpoint.”
Stan Smith, counsel at Wright Lindsey Jennings, said a business’s human capital can be an important aspect of the sale.
“Keep key employees engaged,” he said. “It can even be someone from the family that stays on under an employment agreement or whatever and has the relationship with that key customer or customers so that they’re comfortable continuing with the new buyer because they’ve got someone they’re familiar with that’s going to still be their contact person and so on.”
Those who are selling a business should be sure their financials are in order, including the last three years of tax returns, year-end profit and loss statements, and balance sheets, Campbell said, adding that buyers should be sure to have a credit score of 650 or better and the past three years of their personal financial documents, as well as financial information for any businesses they already own.
“You want to be able to present as clean of a picture of your business as possible,” Rose added. “I would say where I see a lot of people have footfalls or delays or issues, it’s where they don’t have good financial statements and they don’t have consistent financial statements.”
Equally important is ensuring contracts and legal matters are handled well.
“If you have that one or more key customer that’s generating the bulk of your business, is there a contract that supports that business?,” McCastlain said. “Is the contract assignable? Can it be terminated on short notice? In other words, is that contract for that key customer still going to be in place posttransaction? That key customer’s business is going to be key to the valuation.”
Starting early can give sellers an edge when it comes to the negotiating table, Rose said, so those considering selling their business in two or three years should not wait two or three years to get started.
“You lose negotiating power, and you lose the ability to really go out and test the market and shop your business to the broadest group of buyers possible,” he said. “My clients, especially sellers, who have just waited until the very last second and have already, in their head, mentally sold the business, buyers and buyers’ attorneys will pick up on that, and they will start dictating terms, and you now don’t have a Plan B because you’ve waited too long.”
Although preparing to sell a business can be daunting, Grimes said most businesses that are already in good shape have a chance at finding a buyer.
“If a business is making money, it has a proven track record of making good cash flow, if it’s established, it’s probably a sellable business if the owner is realistic about the purchase price,” he said. “All it takes, really, is motivation on both sides. If the seller is ready to sell, they’ve got a good business, there’s probably going to be a market for that business because, normally, buyers are looking to either buy themselves a job, or they’re looking to grow what they already have.”