Hardware Retailing The Industry's Source for Insights and Information
By Curtis Gillman
A 2021 Harvard Business Review study found that only 30% of family businesses successfully transition to the second generation, 12% make it to the third and just 3% survive into the fourth generation or beyond. Most of us have heard some version of that statistic before. Whether the exact percentages vary by study or industry, my experience as both a retailer and consultant tells me the underlying message is undeniably true: we are facing a succession crisis in independent business, especially in hardware and LBM.
The encouraging news is that succession failure is rarely inevitable. More often than not, it is the result of issues that could have been identified and addressed years before ownership ever changed hands, with intentional planning, expert guidance and frank discussion.
So how does an independent business beat the odds?
It starts by understanding why succession fails. While every transition is unique, I’ve found that most succession challenges can be traced back to one of three areas: financial preparedness, operational preparedness or emotional preparedness.
While each presents its own unique challenges, I believe nearly every succession obstacle can be traced back to one or more of these three areas.
Financial Preparedness
While I can identify the financial issues that commonly derail succession plans, every business is unique. Decisions regarding estate planning, taxes, financing and legal structure should be made with the guidance of qualified, fiduciary financial, legal and tax professionals. The cost of professional planning is almost always small compared to the value it protects.
Because financing is often one of the greatest hurdles in a successful ownership transition, I asked Darin Manis, one of the industry’s leading experts in acquisition financing, and the founder and CEO of LoanBox, to share what he is seeing in today’s market.
One of the most significant trends Darin sees today is what he calls the “real-estate value gap.” As he explains:
“In plain English, an owner who purchased their property between 2000 and 2005 may have seen the real estate appreciate three to four times in value, while the hardware business itself has only grown one-and-a-half to two times. Today, the land may trade at eight to 12 times its rental income, while the business trades at only 2.5 to 3.5 times Seller’s Discretionary Earnings (SDE). When the business and real estate are sold together, the combined purchase price often can’t be supported by the business’s cash flow. Even with a willing buyer, the financing simply doesn’t work.”
In other words, a healthy business doesn’t always make for a loanable acquisition. Without years of planning, appreciation in the real estate can outpace the earning power of the business itself, creating a gap that neither the buyer nor the lender can overcome.
Darin emphasizes that the real-estate value gap is not insurmountable, but it does require intentional planning well before a business is brought to market. One possible solution is a sale-leaseback transaction, where the real estate is sold to an investor while the operating business is sold to the incoming owner. Other strategies may also be appropriate depending on the circumstances, but they often require years of advance planning and the guidance of experienced financial, legal and lending professionals.
Another example of how short-term financial decisions can undermine long-term business value is an excessive focus on minimizing taxable income. Every independent business owner should work with their CPA to take advantage of legitimate tax planning strategies. The challenge arises when the pursuit of lower taxes consistently comes at the expense of demonstrating the true earning power of the business.
While minimizing reported income may reduce today’s tax burden, it can create unintended consequences when it comes time to sell. Most buyers rely on conventional bank financing or SBA loans to acquire a business, and lenders base their decisions on the business’s documented ability to generate cash flow. If years of financial statements fail to demonstrate sufficient earnings, securing financing becomes far more difficult, regardless of how healthy the business may actually be.
One of the biggest shifts in thinking for an owner preparing to exit is moving from managing solely to profit to a balanced approach of managing for profit and transferability.
The simplest solution is to begin preparing long before a sale is on the horizon. By working with a qualified CPA and maintaining accurate financial statements that reflect the true earning power of the business, owners put themselves in a far stronger position when it comes time to transition the business or determine its value. If those financials haven’t been maintained, it’s important to begin addressing the issue as early as possible. Depending on the circumstances, it may take several years of consistent financial performance to demonstrate the earnings needed to support a successful sale.
Operational Preparedness
Independent hardware and LBM retailers have built their businesses by being deeply involved in day-to-day operations. They solve problems, serve customers, answer questions and step in wherever they are needed. That hands-on leadership is one of the greatest competitive advantages independent businesses have over larger competitors.
The downside is that succession planning rarely feels urgent amid the daily demands of running the business. In the operational whirlwind, preparing the organization to succeed without the owner often becomes one more important task that gets pushed to tomorrow.
Owners become indispensable because they’re great operators, but the challenge arises when the business becomes dependent on that one person’s knowledge, experience and daily involvement. Many hardware and LBM businesses become so accustomed to having their owners and senior leaders on the sales floor that it’s difficult to imagine operating without them. The irony is that the very people most needed to prepare the business for succession often feel they can’t step away long enough to do it. If that describes your business, don’t view it as a reason to delay succession planning. View it as evidence that operational preparedness should become a priority today.
The root of owner dependency is often a failure to transform operational knowledge from tribal to documented and repeatable.
Some responsibilities are highly specialized. Whether it’s small engine repair, pipe threading, milling or another unique service, those skills can’t simply be written into an operating manual and mastered by a new employee in their first week. What can be developed is bench strength through intentional cross-training and knowledge transfer. Every critical function should have someone being trained to carry it forward.
When that isn’t practical, it may be time to take an honest look at whether that service remains sustainable or whether its value to the business justifies its dependence on a single individual.
More often than not, the problem isn’t highly specialized services. It’s the hundreds of routine tasks that quietly become dependent on one person over the years. Operating the register. Cutting keys. Opening the store and closing the store. Resolving customer complaints. Approving returns. None of these responsibilities are particularly difficult on their own, but together they create a business that can’t function confidently without its owner. A business that depends on one person is difficult to transfer because the buyer isn’t just acquiring the business; they’re inheriting the dependency. Cross-training, documenting processes and empowering future leaders aren’t simply good management practices. They are investments in the long-term transferability of the business.
As business owners, we take tremendous pride in doing things well and delivering an exceptional customer experience. That pride can unintentionally make it difficult to trust others with responsibilities we’ve mastered over decades.
Fortunately, documenting and transferring knowledge has never been easier. Regardless of your opinion of artificial intelligence, it has become one of the fastest and most practical ways to capture institutional knowledge, develop SOPs and preserve one of a business’s most valuable assets: the experience of its people.
Emotional Preparedness
Planning for retirement isn’t just about financial security or estate planning. For many business owners, the greatest challenge isn’t preparing to leave the business financially. It’s preparing to leave it emotionally.
For someone who has spent decades building a business, that business often becomes so much more than a job and a source of income. It becomes part of their identity, their routine and their purpose. After many years of beginning each day with a mission, what happens when the alarm doesn’t need to be set? What happens when you’ve played enough golf, the grandkids go back to school and no one is calling to ask for your advice or approval? Those are difficult questions, but they deserve honest answers long before retirement arrives.
Without that preparation, even the best intentions can create challenges for the next generation. An owner who hasn’t fully transitioned emotionally may find themselves continually checking in, offering unsolicited advice or second-guessing decisions. While those actions usually come from a genuine desire to help, they can unintentionally undermine the confidence and authority of the very people entrusted to carry the business forward.
Mental preparation for handing off the business begins long before the ownership transfer is complete. A new owner will almost certainly change long-standing processes, technologies, relationships and ways of doing business. To the retiring owner, those aren’t simply procedures. They represent decades of hard-earned experience, countless mistakes and lessons learned. It’s natural to feel protective of them.
That is why trust must begin long before succession. Future leaders need opportunities to make meaningful decisions, challenge long-standing assumptions and occasionally make mistakes while the current owner is still at the helm, able to coach rather than control. If we never allow emerging leaders to “upset the apple cart,” we shouldn’t expect that transition to become any easier after we leave.
I’ve seen too many situations where capable successors become paralyzed because they believe every decision will be second-guessed. I’ve also seen former owners struggle to let go, continually warning of the next “emerging catastrophe” if the new leadership chooses a different path. More often than not, those warnings come from a place of genuine care rather than ill-intent. Even so, they can prevent the new generation from building confidence, earning credibility and leading the business into its next chapter.
Every leader, not just one approaching retirement, must be willing to let trusted people challenge the status quo. That doesn’t mean ignoring poor decisions or allowing preventable mistakes to damage the business. It does mean taking an honest look at our own motivations before stepping in. Are we preventing real harm, or are we protecting our own control? Are we sharing wisdom, or are we unintentionally denying someone else the opportunity to learn, grow and perhaps show us a better way?
The responsibility doesn’t rest solely with the retiring owner. The next generation has an important role to play as well. The business they are entrusted with the care of represents someone else’s life work, and that deserves both respect and empathy. Taking time to ask questions, seek advice and understand why previous decisions were made not only provides valuable perspective, but also builds trust. A successful transition isn’t about choosing between honoring the past or embracing the future. It’s about having the wisdom to do both.
