John A. Cox cut the cord a year ago to a trucking company he founded in Hanover County 33 years ago.
“It was my baby, my blood and sweat,” the former state Republican delegate from Hanover County said about the venture he began with no operating capital and no customers. “I started from scratch with a hope and a dream. I am truly an example of living the American dream.”
He passed that dream onto Jay Smith, the new owner and CEO of Cox Transportation Services, who has worked at the company his entire career.
More than a loyal employee who learned every facet of the business and rose through the ranks, Smith was the son of one of Cox’s closest friends who was killed 29 years ago in a private plane accident. Smith was 17 at the time.
“The company is not only surviving but thriving under Jay’s leadership,” Cox said. “It gives an old man comfort knowing I left a good business intact and families’ livelihoods weren’t interrupted.”
Cox, 70, said he could have sold the company for more to a major motor carrier. “But money isn’t everything. The company would have lost its identity, and employees would have lost their jobs. That was not the fair thing to do.”
A succession plan is vitally important to ensure that a business continues in a manner consistent with the founder’s vision, said Harold G. Martin Jr., a partner at Keiter and head of valuation and forensic services at the Henrico County-based accounting firm.
The lack of a strategy can result in the involuntary transfer of ownership through the death of the owner, a divorce, a bankruptcy or disputes with shareholders, Martin said.
“What’s driving this issue is the post-World War II generation — baby boomers who became business owners and are nearing retirement,” Martin said. “Over the next 10 to 15 years, we will see about 7.7 million business owners transfer their ownership positions. The transfer of wealth from the sale of closely held businesses will approximate $10 trillion.”
Business owners need to look at how to effect an orderly transition to ensure the business will provide for their future needs and their spouses in retirement, he said.
Most family-owned businesses do not survive the transition from founding owner to second generation, according to the Family Firm Institute Inc., a Boston-based association for family enterprise professionals.
“By the second generation, about 70 percent are no longer in family ownership, only 12 percent pass into the third generation and less than 3 percent endure into the fourth generation or beyond,” according to the institute. “Many of these businesses may be quite successful and choose to sell outright, but many fail miserably, weighted down by legacy and often bringing the family down with it.”
If a son, daughter or third party is not brought into the business and groomed to take over, the entrepreneur is often forced to sell the business to a third party with management skills, succession experts say.
“The founding business owner typically is the rainmaker,” Martin said. “He generates the business and has the customer relationships. He doesn’t have anyone to step into his shoes. That is a situation we see time and time again.”
To maximize the potential value and put a succession plan in place for the future, the owner first needs to know the current financial condition of the company.
To do this, the owner should have an audit or review of the financial statements to ensure conformance with generally acceptable accounting principles, Martin said. “If a business simply relies on its own internal financials, it may overlook accounting and financial reporting issues that a certified public accountant would be able to identify.”
The next step is to value the business. “Most business owners don’t have an accurate understanding of what a business is worth or how to go about enhancing that value,” Martin said.
“Value is not simply what the owner believes it to be. Nor is it the company’s book value.”
If it’s a service-oriented business, the majority of value often is found in intangible assets, such as the assembled workforce, customer lists, trademarks, copyrights and contractual agreements — assets typically not present on a balance sheet.
A valuation provides an estimate of the true economic value of a business. It looks at value drivers and internal and external risk factors that affect financial performance and business value. The objective is to identify those things that an owner can influence to maximize the value of the business.
The succession-planning process involves more than a business valuation, Martin said. The team of advisers should include attorneys who specialize in corporate law, trusts, estates and shareholder agreements; an insurance specialist to assist with appropriate types and amounts of insurance; and a tax consultant to assess the tax implications of an exit strategy, Martin said.
A business owner can transfer ownership, typically to a family member, and/or sell his or her interest. The buyer could be another business owner, an employee or a third party; or, in some cases, employees can buy a company through an employee stock ownership plan.
Keiter conducted the business valuation for Cox to sell his business to Smith. “It took a lot of work, planning and coordination,” Cox recalled. “I felt like they were going through my whole life.”
The accounting firm came up with a range of value, a low end and high end. “We came to good terms,” Cox said about his agreement with Smith.
Cox handed over the keys to a firm with a fleet of more than 100 trucks and a staff of 160 people.
“My plan is steady growth going forward,” said Smith, 47. “First and foremost, I want to continue to deliver excellent service.”
Smith started working for Cox Transportation when he was a sophomore at Virginia Commonwealth University. When he graduated in 1990, Cox offered him a full-time job.
“He never gave me any reason to leave,” Smith said about Cox. “Title was never important to me. I wanted to know how to do everything. ... My goal all along was to be in trucking. I like the industry. It is the backbone of our country. Most everything you have was once on a truck.”
Regulations are too onerous now for an entrepreneur to start a trucking company, Cox said. He was able to do so in 1982 because the industry was deregulated then, allowing entrepreneurs like himself to apply for a license. “It was only me and one other employee. I couldn’t afford to pay anyone else.”
He operated as a middleman for a couple of years, arranging truck transports. His first client was with Richmond-based A.H. Robins Co., trucking Advil and Robitussin all over the country.
In 1984, he went to a used truck dealer in Charlotte, N.C., to buy his first truck. “I was so proud driving down the road.” His wife, Dottie, was not impressed that he paid more for a truck on its last legs than they did for their house in Mechanicsville.
The business continued to grow, expand and survive difficult times. “Trucks are red, white and blue,” Cox said. “We (as truckers) are proud of what we do for the American consumer.”
Smith became president in 2009 when Cox was elected to the 55th House District seat in the General Assembly. He served two terms, which took him away from day-to-day operations of the business for four years.
“I couldn’t do both and do both well,” Cox said about being a delegate and a business owner. When Cox decided not to run for re-election, Smith wanted to know about the future of the company.
“I’m waiting for you to buy me out,” Cox told Smith.
Cox and Smith still talk most every week. Like Cox, who once served as chairman of the Virginia Trucking Association, Smith holds that title now.