Turning over the keys to your equipment dealership

As an increasing number of Baby Boomers approach retirement age, business owners in many sectors are facing the question of when—and how—to transition ownership. For those in specialized industries, such as heavy equipment dealership, that question holds extra weight due to the smaller pool of people to potentially take the reins.

Due to the magnitude of the decision and the emotions attached to it, some dealer principals who are reaching retirement age don’t have a plan for what’s next, noted Darren Grahsl, director of Dealer Financial Services at BOK Financial®. “It’s a deeply personal decision,” he said. They’ve likely poured their lives into their business, and a portion of their identity is inevitably tied to it.”

And this avoidance isn’t unique to dealer principals: Despite the clear need, only 25% to 40% of business owners in general have a concrete strategy in place, according to Mike Benedict, a business transition advisor at BOK Financial. Even fewer—just 20%—have a written plan to transfer ownership, based on a 2022 survey by the Business Enterprise Institute.

However, the consequences of this delay can be steep. Without a clear transition strategy, dealer principals risk losing value, legacy and continuity, which could hurt their dealerships, their employees and even themselves, experts agreed.

Early planning is key
Even if you have no plans to step down from your role, it’s not too early to plan for when that day comes; in fact, it’s prime time to start.

“Generally, owners start thinking about it too late for an optimal exit,” Benedict said. “Planning three or more years in advance typically leads to a smoother process, more value and less stress.”

“When people consider the amount of money at stake, it helps to sit down and do the work of sketching out what that exit plan might look like,” Grahsl agreed. “The earlier you start, the better.”

What transition plan is right for you?
Dealer principals who begin planning early have more time to explore their options rather than settling on the path of least resistance. Typically, there are three main paths for transitioning ownership: 1) an internal transition, 2) a family transition, and 3) an external sale. Benedict broke down the pros and cons of each.

Internal transition: This route may involve a management buy-out or an employee stock ownership plan (ESOP), where ownership is gradually transferred to employees. ESOPs offer tax advantages and a way to preserve legacy while rewarding long-time staff. However, they require a certain business size and financial profile.

“While an ESOP can be expensive compared to transitioning to a family member or direct sale to employees, it tends to be less expensive than a third-party sale,” Benedict explained. One option is for the departing dealer principal to receive part of the transaction price upfront and the rest over five to ten years, which can provide them with a steady income.

Family transition: For family-owned dealerships, passing the business to the next generation is a common goal, but not without challenges. “Preconceived expectations can be dangerous,” Benedict warned. “Some heirs assume they’ll inherit the business without understanding the work involved.”

He also pointed out financial hurdles: “How do you sell a $20-million business to someone who makes $150,000 a year? It can be done, but it takes time and planning.”

Parents often want to gift the business to their adult children, but they have to keep in mind that they may need to extract some money from the value of the business to fund their retirement. Additionally, successors may struggle to maintain the same lifestyle if the business hasn’t grown. To help reduce the potential for family conflicts, Benedict emphasized the importance of separating business-active and non-business-active children, as well as business and non-business assets.

External sale: Private equity interest in the heavy equipment dealership industry is growing, but most external sales are made to strategic buyers, who are often nearby dealers or competitors. While this path may yield a premium, it comes with risks.

“Almost every business owner gets inundated with potential buyers, brokers, investment banks,” Benedict said. “But you need to avoid getting a false sense of security. Many of those buyers are bottom-feeding and trying to reduce your leverage.”

What to do next
A thoughtful plan, developed with trusted advisors, can help dealer principals avoid these pitfalls and identify the best option for their situation.

Both Grahsl and Benedict agree: the biggest mistake is waiting too long. “Starting late may require staying on longer than desired,” Grahsl cautioned. Benedict added that chasing a single buyer without preparation can be costly. “You lose leverage, fees pile up and the sale often doesn’t close.”

Instead, dealer principals should focus on creating a “sell-ready” business that’s not overly dependent on the owner, and that has strong margins, a diversified client base and a capable management team. “Even if you don’t plan to sell soon, being ready gives you options and protects against contingencies like death or incapacitation,” Benedict said.

To accomplish this, he and Grahsl stressed the importance of assembling a team of advisors—bankers, attorneys, CPAs and business transition consultants. As Grahsl said, “The diversity of thought from a team is invaluable.”

Plus, having this team can help dealer principals deal with any issues that arise on the way, Benedict said. “Even a well-prepared owner will face stress and setbacks. Working for multiple years with a team you trust makes all the difference.”