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Dan McKinnon has built a growing and diverse business, but hasn’t yet arrived at a succession plan for how he’s going to exit the operation and pass it on to the next generation. Our experts are here to help.

For nearly two decades, business has been good at Graphics House Imaging (asi/212905). Very, very good. Sales have continued to rise, and capital has been so consistently flush that Dan McKinnon, who started the company, practically laughed at the or nearly two decades, business has been good at Graphics House Imaging (asi/212905). Very, very good. Sales have continued to rise, and capital has been so consistently flush, that Dan McKinnon, who started the company, practically laughed at the
notion of bank loans for the first decade of business. Back in 1991, McKinnon, “a product of a family business,” who says entrepreneurialism is “in his blood,” launched a publishing firm. That quickly ballooned into a sign company, then a full-fledged print shop, both of which have been the main order of business for Graphics House Imaging ever since. McKinnon also has a wireless service business that operates under the Graphic House umbrella.

Today, the company, housed amid three industrial buildings strung out within the small industrial sprawl of Muskegon, MI, where it’s headquartered, represents the growth McKinnon and his family have accumulated in 17 years. McKinnon is proud of it, and rightly so. “I was nominated for entrepreneur of the year for 2008,” by the local chamber of commerce, he says, giddy about what he’s accomplished.

It’s a blustery day in mid-December. An overnight snowstorm has frozen car doors shut and sent the temperature down to a high of 16 degrees. But McKinnon is busy touring the warm confines inside Graphics House, where Volkswagon-sized printers are buzzing at full tilt, spitting out job after job. One such print job is a billboard touting chili and baked potatoes for the fast food chain Wendy’s.

The $750,000 HP Scitex TJ 8500 machine responsible for that order is a recent addition to the company. It was no small investment, and at its hefty price tag, a bit of a leap of faith that enough business would come in as a result of the purchase to justify the price. But with the ability to print 4,000 square feet an hour, compared to their next fastest machine at 700 square feet an hour, McKinnon couldn’t justify not making the purchase. For the moment, it seems to be generating new business, since orders to be run on that machine have increased since its delivery.

But, like most small businesses in this crumbling economy, Graphics House is feeling the crunch. That’s been both good and bad. On the one hand, the company has picked up business after smaller print shops that couldn’t withstand the recession closed down. On the other, they’ve seen a drop in orders themselves, and were forced to lay off 11 of their 70 employees late in 2008. Hit hardest was the large-format sign business—the kind of business run through their new Scitex machine, and the bedrock of their bottom line.

In 2007, in fact, every branch of the company saw a loss in net income, and McKinnon may be facing the same for 2008. At the same time, McKinnon, who is 59, is looking for a five to six-year exit strategy, but doesn’t seem to know where to start. He’s got two sons, Brent, 38, and Matt, 33, as well as Brent’s wife Gina, each of whom runs a different division of the company. They’re more than eager to take over where their father will leave off.

Here, our experts offer a four step plan to set the company on a good growth and succession path.

STEP ONE:
Begin The Transition Now
Moving Dan McKinnon out of the business so that his sons can assume the reins is more about “psychology than economy,” says Marshall Goldsmith, an executive coach and author of Succession: Are You Ready?, to be released in 2009.

Looking from the outside in, starting a business would seem the hardest part, not walking away. But, “in a lot of cases, the reason that people are hesitant to step back is that they’re concerned about the ability of other people to do it the way that they’ve always done it,” says David Blaise, an industry consultant and president of Blaise Drake & Company, a business consultancy in Wyomissing, PA.

That separation can be one of the hardest things an entrepreneur ever does, leaving the future of his creation to the fate of others – even if they are trusted family members. Blaise suggests that Dan start by identifying aspects of the business he’s not currently comfortable with other people handling. Then, create a procedure for how he wants to see that process completed, delegate that process to a staff or family member, and supervise them about proper procedures while he is still at the office on a daily basis.

Ultimately, though, Dan may need to realize that the next generation is going to bring with it new procedures, goals and processes for accomplishing future growth.

Another sticking point for many business owners—and a frequent reason why they find it hard to leave their company behind—is that they don’t have anything waiting on the other side. The real question, Goldsmith says, is “what the hell are you going to do for the rest of your life?”

It’s a tough question, and one many entrepreneurs have a hard time answering. “He needs to say, ‘What am I letting go of, and am I willing to let it go?’” Goldsmith says.

Answering that question is never easy, particularly in a volatile economy. “Right now times are hard,” he says. “It’s hard to leave when things are going bad, because a business owner thinks, ‘They need me.’ It’s hard to leave when things are going good because you’re the hero.”

Dan will find the way out easier if he starts to focus now on key relationships, skills, and tasks and delegate those sooner rather than later. That way, he has time for corrections before he leaves the company altogether.

STEP TWO:
Assess Second Generation Talents
Part of the process of figuring out what Dan’s good at and what skills he needs to pass on, of course, will involve comparing that list with what Brent and Matt are best at. That starts with their working styles. As the father of seven, Dan has certainly tried to involve most, if not all of his children in the business. But, with the exception of Brent and Matt, most of them have either lost interest or haven’t worked out. Not so for Brent and Matt, who have worked in various parts of the company for 15 years.

Over that time, they’ve established a sense of how they work together and where workplace conflicts in working styles may arise. “I’m more the marketing and sales guy. Matt is very structured and has an accounting type mindset,” says Brent. “His strengths are different than my strengths. We definitely have different visions.”

For the moment, Dan’s vision is what’s driving the company forward. “My dad is really the guy who knows where the railroad tracks are going,” Brent says.

But, moving forward, the two sons will need to gradually take over that vision, slowly absorbing and taking on CEO tasks that Dan performs now. “I think that it’s really important that Dan look at his current responsibilities and say, ‘What can I start letting go of now?’” says Goldsmith.

Even Brent admits there are differences in vision between father and sons. While Dan is moved to combine the companies under one roof, for example, but isn’t convinced when that move should be made, Brent says the future should definitely be combined toward one entity. “The printers of the future will be very diversified and will market themselves as one company with many services,” Brent says.

At the moment, Dan has his eye on a much larger facility in Muskegon that could house all three of the company’s divisions under one roof. But to buy that building he would need to sell one or two of the three buildings they now operate out of. In a tight real estate market, that’s been tough. For the moment, Blaise says, they may need to sit tight and weather the recession in three different buildings.

Instead, he says, now is perhaps a better time to focus on how Matt and Brent can slowly take over their father’s role as company leaders. The best way to do that might be to write down what Matt and Brent are good at—in client relationships daily tasks, employee relations and other office duties—then divide up managerial tasks that reach over both of their divisions.

STEP THREE:
Begin a Gradual Withdrawal
Stepping away professionally may be one hurdle. Equally as daunting will be figuring out how Dan can best walk away financially. “When you transition a business, you don’t want to flip the switch and say, ‘Here’s the key, it’s yours,’” says Craig Silverman, a retirement planning specialist with AXA Advisors, a financial wealth management company in Uniondale, NY. Figuring out how to divvy up or hand over the business financially can be a tricky matter, he says. To start, the McKinnons should have a certified business valuation done to know the true value of the company. Selling it all at once to his children could net Dan a hefty capital gains tax. Not good. Instead, he has other options, Silverman says. One is an installment sale, in which the company is sold off in pieces over several years. That kind of sale can help ease the tax burden for the seller by ultimately reducing estate taxes.

By selling portions of the business over time, Dan also maintains a controlling stake for longer and can help Matt and Brent ease into the role of company leaders and allow them the opportunity to make mistakes and learn under his supervision as he gradually exits the company. With an increase in ownership each year “comes a variety of different roles and responsibilities,” Silverman says.

Currently, the company has an advisory board of managers that was set up largely to help Dan’s sons talk through and make executive decisions. Through group consensus, they can all agree that choices being made are the best ones moving forward. But Dan still has ultimate say over what the board decides. Eventually, they’ll need to create a timeline as to when the advisory board operates completely on its own without Dan’s overview of the minutes from each meeting.

STEP FOUR:
Determine Growth Going Forward
With just 11 sellers, who operate as an inside sales team, the company has experienced substantial growth through phone sales alone. Sales for Graphics House Imaging in 2007 were $2.6 million, which were down very slightly from the year before. Generally the company has seen steady growth since its start. With the hiring of a national manager about a year ago, that may be changing. Recently, “I’ve taken sales reps out on the road to meet face-to-face with current clients to take relationships to the next level,” says Robert Schaeffer, the company’s national sales manager.

That’s a smart move, says Dave Lakhani, president of Bold Approach, a sales, marketing and public relations firm in Meridian, ID, because it could strengthen relationships in a down economy. That said, in this sluggish marketplace, it’s not as necessary to make face-to-face sales calls. When virtually every company is slashing travel budgets, clients will understand if their sales contacts are dealing with them through a phone line rather than across a desk. More to the point, Lakhani says, the company can maintain high and intensive visibility through regular phone calls, e-mails and direct mail pieces. Still, occasional face-to-face meetings can’t hurt, if conducted with important clients. Lakhani suggests that Schaeffer test in-person selling with several top clients. If that proves effective, he says, it would be smart to build in face time with other, similar customers.

To create synergy, Graphics House Imaging and Graphics House Printing have asked sellers to push—or at least mention—services available from the side of the business they don’t specialize in selling. In other words, a seller who focuses on large-format printing is encouraged to mention offset printing services to his clients.

Working those synergies is smart, Lakhani says, but a brief mention doesn’t lend much credibility to the company’s services. Instead of having the large-format seller pitch offset printing as an aside at the end of the call, he says it would be better for the seller simply to suggest—or, better yet, set up—a meeting between his client and an offset printing salesperson. That way it’s more official and the information delivered is from an expert, rather than a salesperson pitching a service that’s not within his area of expertise.

Lakhani likes the fact that the company counts minor league sports franchises among its vertical markets. But he suggests that they build upon that niche, tapping every league within the territories they sell, and even going after major league business. Dan says that business is too big for their equipment to handle in house. But in a tougher economy, Graphics House may need to get more resourceful, outsourcing any large jobs that come their way. That way they’re at least taking a percentage of the sale. And work from large companies, such as Wendy’s, shouldn’t be just for one or two outlets, but for all Wendy’s in a particular state or region. Ultimately, their goal, Lakhani says, should be to pick up large-print orders for the entire chain. That same business model should be applied to all large-scale clients they have.

The company’s numbers show ups and downs in income over the past three years. In a bad economy, that can spell serious trouble. But poor markets also offer opportunity, Lakhani says. What to do? He suggests that the McKinnons look at current markets that offer existing “sweet spots” that they could easily penetrate further. Then mail 2,000 to 3,000 test mailers to companies in those areas. After initial contact, Lakhani says, they should “market to them on an ongoing basis—once a month for a year.”

The idea is to lock in existing clients with additional business or penetrate market segments with new clients now. That way, when the economy improves, they’re in solid shape. “If they can fill voids in their marketplace, now is the time to do it,” Lakhani says, “because when they come out of the sluggish economy, they’ll be well positioned to do even better and grow much more quickly” than the competition.
In addition, Lakhani suggests that they push hard into the smaller printshop market as a way to pick up more outsourced jobs for those places that can’t handle large format printing.

Betsy Cummings is senior writer for Counselor.