The Perfect Succession Plan

Johnson’s attention to detail and careful planning paid off recently when she sold her company to John

Topetzes, the firm’s vice president of operations and sales.

The succession plan had been formal since 1999, but it had been discussed as early as 1992, during Topetzes’

interview process. 

“There were no promises, but there was the idea that there was a long-range opportunity to become a part or sole owner of the business,” Topetzes said. “That was one of the reasons I chose to work here, the opportunity that someday I might have the chance to own the business myself.”

Johnson began working at her family’s business in 1977, when she started as an office assistant. She was eventually promoted to company president in 1987, when her father retired.

“I stated at that point that at some point I wanted to buy the company and started pushing for it,” she said. “It was something that I had to push for, to get my dad to do it. If I hadn’t said anything, he would have died with it. And I wanted it when I had enough energy and strength (to grow it).”

With the assistance of the accounting firm Vrakas/Blum S.C., Johnson created a sales company named Sanborn Tube Sales of Wisconsin Inc., which could absorb sales growth. The company enabled her to raise enough money to use as a down payment for her eventual purchase of Sanborn Tube.

“Dad owned the warehouse and the inventory, but sales were my responsibility and came under my company name,” Johnson said. “That started in 1992.”

By 1996, Johnson and Topetzes had grown Sanborn Tube’s sales to the point that it needed a 40,000-square-foot addition to double its warehouse. James Sanborn, who did not sell the company to Johnson until 1997, did not want to put any money into the company. So Johnson’s sales company obtained a loan to expand the building, while James Sanborn owned the company and its original building.

Once she bought the company from her father in 1997, Johnson consolidated both companies, taking the Sanborn Tube Sales of Wisconsin name.

Johnson started thinking about a succession plan in the early ‘90s, well before she owned Sanborn Tube. Once she owned the company, she believed that the ideal plan would clearly spell out when, to whom and under what circumstances she would sell her company. She said her beliefs were reinforced by her peers, suppliers and fellow members of business groups she was involved in.

“I knew that I wanted that,” Johnson said. “Just because you’re small doesn’t mean that you don’t need to do a plan. You learn from others that haven’t done a plan.”

Johnson also believed she needed to create a succession plan to attract and keep a qualified candidate inside the company.

“Generally the person who knows your business the best is your best successor,” she said.

Laying the groundwork

Although she discussed the potential for becoming a part or sole owner with Topetzes during the interview process, it was not formally raised until the late ‘90s, when she bought the company and he was promoted to sales manager.

“At that point was when we really began talking about a succession plan,” Topetzes said. “It was a natural progression that turned into a formal plan. Both Cathy and I wanted to create a long-range succession plan.”

The first version of the plan took about 18 months to craft. When it was put into place, the plan carried a growth incentive for Topetzes that was similar to what had been created for Johnson. Bonus money and deferred compensation was set aside, allowing Topetzes to build up a down payment for Sanborn Tube.

Over the next nine years, Johnson, Topetzes and the company’s accountants and lawyers held quarterly meetings to adjust the succession plan, based on how the company was doing. Although there were several tweaks to the plan throughout the years, its fundamentals did not change, both Johnson and Topetzes said.

“With every milestone, John said he was ready for the next step,” Johnson said. “He was in charge of sales, then he was ready to be operations manager, then the plan was put in place and then he was ready to be the owner. It was pretty amazing – from the day he interviewed to when he came on board, the plan stayed the same.”

“This worked, No. 1, because Cathy and I were committed to the plan,” Topetzes said. “And No. 2, because the perseverance and patience that one needs to make it work was there. For Cathy and I to be able to come together and put (the plan) together, part of it is our commitment and part of it is a little luck.”

Poised for growth

Sanborn Tube serves customers who need mechanical tubing, extruded aluminum, fabricated or finished parts and plastics or specialized parts. However, Sanborn Tube does not make any of the parts or components it ships to its customers. Instead, it sells tubing, components and finished parts to manufacturers.

The combination of manufacturer’s representative, distributor and virtual manufacturing has helped set Sanborn Tube apart from its competitors, Topetzes said, because none of them offer the same range of services.

“We don’t have a set product line,” Topetzes said. “That’s one of the things that distinguishes us from others. We don’t buy general stock or on spec. The virtual manufacturing process is predicated on the customer’s specific needs. For someone with the entrepreneurial spirit, this is a way to be included with the customer and to help them with issues they’re facing. It’s a ball.”

Sanborn Tube’s best prospects for growth lie in its virtual manufacturing areas, Topetzes said, largely because of the demographics of the manufacturing industry in southeastern Wisconsin.

“There are a number of talented, knowledgeable fabricators and manufacturers in the Midwest, particularly in southeastern Wisconsin,” he said. “But they don’t have the sales and marketing people that we do. We become the sales and marketing arm for these small manufacturers and fabricators – they bring us capabilities and we bring them the customer.”

For the first three quarters of 2008, Sanborn Tube was on pace for record sales growth. Sales have slowed for the fourth quarter, and Topetzes is forecasting a soft 2009.

“We’re being told by our top customers that 2009 is going to be soft,” he said. “My plan to overcome that decline in our existing sales and business is to aggressively pursue new business with our existing and new customers. That’s what has gotten us to where we are today, an aggressive approach to the marketplace.”

The ‘hunter’

When Topetzes was hired, Sanborn Tube had six employees. The company has 13 workers today, and is now looking for additional sales staff to help it grow its business with existing customers and by establishing new relationships, Topetzes said.

Topetzes has interviewed several candidates for new sales positions, and knows that it will take time to find the right candidate because he has a specific personality type in mind.

“I’m looking for a hunter,” he said. “Most (salespeople) are order takers. You have to pursue business, you can’t wait for it to come to you. We have had that approach, and it does pay off.”

At some point in the next few years, Topetzes hopes to create a new succession plan at Sanborn Tube. While he does not have a successor in mind, he believes there are several candidates at the company who might pan out.

“We have several young and younger employees that potentially could follow the same path that I took,” Topetzes said. “It goes back to the patience and process. Do they have the required patience and perseverance? I anticipate that in the next year or two I will be approached by someone.”

However, Topetzes said he has has much to accomplish before he is ready to sell his newly acquired company to a successor.

“The goal is to grow – to take it to the next level,” he said.