Throughout the rental industry, founders built their businesses as a means of having something outlive themselves – to make an impact beyond their lifetime, often to be handed down generationally. In the age of the “serial entrepreneur,” others opt to build an efficient business quickly that they can sell just as quickly, then move on to the next challenge.

Whether you’re getting ready to pass your rental business down to the next generation or prepping for a sale, the key to doing it successfully is succession planning.

Several rental leaders from throughout the world who have been through their own generational exchanges and business sales shared their stories and tips in our succession planning webinar; you’ll find clips throughout this blog from:

  • The American Rental Association’s Josh Nickell, who owned and sold Nickell Rental
  • Kerr Hire’s Jarrod Kerr, who now runs the business while sharing ownership with his sisters.
  • Larry Harris, who bought Ada Sales & Rental from his parents before selling it
  • Larry’s brother, Point of Rental CEO Wayne Harris, who acquired the software company from its founders.

Check out the full webinar here.

Prepare Early, Engage Experts, & Business Valuation

The best time to start planning for the eventual sale of your business is the day you create it. The second-best time is now.

By thinking about where your business will go from the beginning, you’re able to optimize your decisions – from what you purchase to even what kind of locations you intend to acquire.

But today, you’re ready to sell: The first thing you’ll need to do is understand how your rental company is valued. Valuation methods can vary significantly depending on which vertical you’re operating in. For general rental and equipment rental businesses, valuation usually hinges on the worth of the inventory and a multiplier of your EBITDA (earnings before interest, taxes, depreciation, and amortization). On the other hand, event and party rental businesses tend to be valued more on their revenue and EBITDA.

All of our experts advise engaging with experienced, third-party professionals in the rental industry for an accurate valuation. Associations like the ARA or your fellow industry members can help guide you toward trusted partners that can provide you and your family with a reliable outsider’s perspective on the value of your business.

And you don’t have to wait until you’re selling to get valuations done! While running Nickell Rental, Josh had a valuation done annually on his business, which helped guide the company’s growth, kept the family on the same page as far as where they were going, and allowed for decision-making that maximized the value of their eventual sale.

Because these transactions tend to involve a large amount of money, and because rules vary so much by region, business, and transaction type, you’ll want to bring in trusted lawyers and accountants to determine the legal and tax implications of a sale.

Finance the Transition

When you’re handing a business down in a generational transfer, handling the financial transition itself can be its own challenge. After all, parents often need money to retire, but the business needs money to operate.

Clear and transparent communication between family members (paired with a third-party valuation) can align expectations and reduce potential conflicts. There are a few typical ways these transitions are financed:

  1. SBA Loans
    Often, the acquiring party will take out a SBA loan, which gives their business the funding required to continue operating as they buy the business from their parents.
  2. Personal Loans
    Another option, depending on rates and the prevailing laws, is to take out a mortgage or borrow against other property in order to pay off the debt incurred by buying the business.
  3. Private Equity
    If a business is too large to be acquired via conventional loans, private equity offers a pathway for parents to monetize their stake while allowing the next generation to lead.
  4. Taking Your Time
    Sometimes you’ll know early on that the next generation is hungry to lead (or sometimes parents can be patient in taking payments). In this scenario, the first generation gradually becomes shareholders while the next steps up to lead the business.

Because the last model takes place over a longer period of time, it’s probably the easiest to manage financially. However, it requires clear communications about job roles as responsibilities shift throughout the process to avoid confusion at the office and conflict at family gatherings.

Communicate With Your Team and Customers

Succession planning doesn’t just require communicating with your family – there are other important stakeholders in your business as well. Consider your messaging to two groups in particular:

Your Employees

Any time there’s a transition, it’s natural for employees to get anxious. How will their roles change? Will they still even have a job? Are they going to lose their colleagues? Think through the ways this transition will affect them and do your best to address their likely questions. Emphasize the positive outcomes you’re expecting, and remind them that they’re being considered throughout the process.

Your Customers

Again, depending on the amount things may change for your customers, have a plan in place to communicate upcoming changes and to inform them of how the transition will benefit them.

Create Value With Technology

Collecting and tracking your business data within your software benefits you in several ways, whether it’s rental software, GPS tracking, parts tracking, CRM, no matter when you implement it.

In addition to providing a great source of up-to-date business data, which will help you get accurate valuations and plot the future of your business, your technology should be considered part of your business’s value when selling.

As Josh said, “Nobody really wants to buy that business where the owner has said ‘Wait, stop. Let’s not spend money on anything for 10 years, so that we can be super profitable, but the new owner’s going to have an amazing headache.’” Technology investments add value to your buyers, so you’re still able to get value from them even as you’re handing your business over.

Successful succession planning forces you to think about the value of your business and your personal values. Whether you intend to pass your rental business along to the next generation or sell it to someone outside the family (either biological or business), you’ll need to prioritize the needs of several groups.

Working with trusted third-party resources, knowing your value, communicating with your stakeholders, and just plain planning ahead will help take a lot of the stress out of the process. The work you do now in succession planning helps set up the business you’ve built (or helped build) to thrive for generations to come.