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From startup to succession: Northeast Ohio entrepreneurs learn to plan early for the future

Larry Fulton works from a home office on Friday, Jan. 5, 2024.
Ryan Loew
/
Ideastream Public Media
Larry Fulton works from a home office on Friday, Jan. 5, 2024.

In 2003, Larry Fulton bought a small business in Middlefield that made wood pallets, immediately relocating the enterprise to Cleveland. Even as Fulton built what would become LEFCO Worthington — an export crating and industrial packaging business — he already had designs on selling the company.

In April 2023, Fulton sold LEFCO Worthington to Evergreen Cooperatives, a Cleveland-based organization that transitions businesses to an employee-owned model where workers own shares of company stock. Though Fulton’s intention always was to sell, he first took time to understand the business’s inner workings, he said.

“It took me five to seven years to get my hands around operations,” said Fulton. “I try to implement metrics and standard operating procedures as soon as I can.”

While Fulton does not have a concrete succession plan for his current business, the fiberglass fabricator Hanlon Composites, he was quick to implement a new electronic filing system and other upgrades to create value for buyers down the road.

“I look at companies as an asset,” Fulton said. “With any asset, you want to make sure you value it. That it’s performing the way it needs to perform.”

Making improvements impacts a company’s worth before and during the succession process, although entrepreneurs eyeing an exit should give themselves a years-long cushion in which to plan. This could include defining your customer base as well as having a complete management team in place, noted Christopher McKenna, managing partner with Cleveland investment banking firm Carleton McKenna.

“We help companies as far ahead as we can, because there are some things you can fix in relatively short order,” said McKenna. “The more time you have in planning an exit, the more things you can address, and the higher valuation you can derive.”

Devise a strategy first

McKenna’s firm handles internal successions where founders are selling to family or fellow team members. External successions, meanwhile, encompass sales to outside parties. In a majority or minority recapitalization, for example, an investor provides capital in exchange for a portion of the business.

“There’s going to be a lot of people selling their businesses, so you want to stand out as something very desirable, and something that’s understandable. A buyer can leverage your operational expertise and leverage it with their strengths. The easier you can make that for them, the better.”
Larry Fulton

There are numerous questions for owners to consider during succession — a third-party advisor can guide entrepreneurs through the long transition, said McKenna.

“The thing you want to be thinking about is where you want to be immediately post-transaction,” Mckenna said. “What environment are you operating in? What do you want your role to be? What do you want the role of the company to be? Those are all non-financial sorts of questions, but they’re strategic questions.”

Carleton McKenna works alongside small- to medium-sized businesses with anywhere from $10 million to $250 million in annual revenue. As smaller enterprises may not have the resources to recognize areas of improvement, solving these issues through an outside advisor can make a company more attractive to investors, McKenna said.

“That’s a big deal for a buyer because then they don’t have to discover and solve every weakness in a company,” said McKenna. “You can help lead them with those breadcrumbs.”

Differentiation is another price driver, meaning entrepreneurs are wise to identify what makes them unique, McKenna said. Above all, owners must be thoughtful about the exiting process.

“There’s going to be a lot of people selling their businesses, so you want to stand out as something very desirable and something that’s understandable,” he said. “A buyer can leverage your operational expertise and leverage it with their strengths. The easier you can make that for them, the better.”

Business owner Fulton said he had immediate confidence in Evergreen Cooperatives upon their initial conversations. Sustained company growth is important, but keeping management intact was a crucial component in the final decision to sell.

“It was a mix of their value statement, their vision and seeing eye-to-eye on something as vitally important as culture,” said Fulton. “I wanted to make sure my team was taken care of, too. As leaders, we have to do a good job of communicating change and what that means to individuals on a day-to-day basis.”

The importance of flexibility

Daniel Weiss, owner of Adatasol Software in Highland Heights, is in the midst of selling his custom software business to his chief executive officer. Adatasol is the developer of Studio Suite, a cloud computing platform designed for a media production environment. The plan to sell the company is on hold as the potential buyer deals with a health issue, raising questions for Weiss about both his future and that of his company.

“I knew where I was two years ago; Where am I today?” said Weiss. “You have to reassess that maybe I have to do this for two more years, and is it really that bad? That’s the thing. You get set in your ways in how your future life is going to look, but your current life isn’t so bad.”

A roller-coaster year at Adatasol has been smoothed by EO Cleveland, a chapter of the global peer-to-peer network Entrepreneur's Organization with a location in a renovated Bolivar Road office building. Conversations with fellow founders have given Weiss clarity on the next steps for his 12-person shop — not to mention thoughts about any wisdom he’d pass to a successor.

“What’s their vision for continuing (the business) for another generation?” Weiss said. “I’m selling my baby I’ve owned for more than a decade. And I’m selling it to someone because I see their vision for the future.”

Internal succession means maintaining a culture where work-life balance is precious. Weiss has an entirely remote workforce and very few scheduled meetings during the week. An attorney is assisting with the buyout structure and additional legalities, while Weiss shares updates with executive management.

Currently, Weiss is more concerned about his CEO’s well-being than any forthcoming buyout, he said. Yoga and an understanding family will help Weiss get through the coming year’s challenges, he said.

“Knowing what your values are is number one,” said Weiss. “I look at business as personal, for better or worse. What I’ve built is personal, and I hope my successor will continue that. You definitely have to be flexible, because things can change.”

Douglas J. Guth is a freelance journalist based in Cleveland Heights. His focus is on business, with bylines in publications including Crain's Cleveland Business and Middle Market Growth.