Succession plans are, ideally, implemented slowly and methodically as a primary owner steps into retirement—but that’s often not the case. Tragedy can accelerate the pace of succession, and if it’s not well-planned, destroy a business.

When Noel Kegel’s father, icon Chris Kegel, was diagnosed with terminal cancer, his carefully constructed succession plan, and his family’s ascension into his admittedly large shoes, saved his business, Wheel & Sprocket, and even spurred an unparalleled period of growth. Noel shares his personal experience with succession and tips for other entrepreneurs ready to plan ahead.

Wheel & Sprocket began as an opportunistic venture by an entrepreneur previously in the car business who recognized a way to make a buck during the Bike Boom. Quickly, this entrepreneur, Frank, realized that he needed to hire someone that actually knew something about bikes and found a college kid named Chris Kegel who began working a few weeks after the shop opened. Dad had wanted to own his own shop one day and saw this opportunity to learn how to build a business at the ground level and after a few months dropped out of school to work in the shop, treating it as his education into business. After several years and some success, dad decided it was time to start his own shop. Being an integral part of Wheel & Sprocket by this point, Frank couldn’t afford to lose dad and made him a partner in exchange for simply staying on board. The partnership lasted ten years and saw three other locations open before dad bought Frank out in 1989 to become sole owner. Through the nineties, the shop expanded to four locations and then six by 2001. Wheel & Sprocket emerged as one of the largest dealers in the country, at various times being a top dealer for Raleigh, Cannondale, Specialized, Giant, and Trek. The partnership with fellow Wisconsin-based Trek emerged as the strongest, and W&S has recognized as the all-time top Trek retailer. In 2008, W&S formalized an online operation that has grown to over $2mm and in 2013, W&S expanded into the Chicago region.
Throughout our history, W&S has taken an active and leading role in helping to cultivate the cycling community. Wheel & Sprocket staff can be found at virtually every organized cycling event in our market running mechanical support, driving support vehicles, and running logistics. Hand-in-hand, dad has been a major cycling advocate through service on various local, state, and national boards including the Wisconsin Bike Federation, National Bicycle Dealers Association, IMBA, League of American Bicycles, PeopleForBikes, and others.

Needless to say, Wheel & Sprocket is not an average bike shop, and issues of succession have been vitally important in recent years. Particularly as an organization grown in size and complexity, there is a tremendous responsibility to the market and to staff to keep the flywheel going in the event of tragedy. And this is exactly what happened in September, 2016 when Chris Kegel was given a terminal cancer diagnosis and only months to live.

Once the initial shock and sadness had been absorbed, I saw it as my responsibility to dust off the succession plan that had first been compiled seven or eight years earlier. At that time, dad had consulted with an attorney specializing in business succession to begin to craft a plan for a sudden event of death or disability. At that time, the four kids were in our twenties and though we had always worked in the business, we were somewhat non-committal. Under that plan, a board was to be convened, comprised of various stakeholders including our banker, our COO, representatives from our major suppliers, and our attorney. The job of the board was to provide stability to the organization and provide fiduciary oversight to the operation. In addition, the board was to find and train a new president within five years. This framework allowed the flexibility for someone within the family to be groomed and trained for that role, but also allowed a scenario of an outside president. Ultimately, it would be that board’s job to decide.
By the time dad got sick, many years had passed and both my sister and I had both become vital players in the operation of the business. When we all looked at that original plan, we agreed that there wasn’t the need to convene a board to handle the transition—the kids were ready to assume the ownership and leadership of the company. But how should we handle the details? We knew that dad would realistically have only a few weeks of full mental capacities as his pain management plan would involve many powerful drugs that would affect his mental acuity and stamina. The clock was ticking.

At the time, I recall feeling the need to be very matter-of-fact with the task of refining the succession plan. As the oldest, and longest tenured of my siblings, I felt I had the responsibility to them, to my dad, to staff, and to the business to make sure we did this right. Wheel & Sprocket is a beautiful thing, I couldn’t let it crumble. So, I quickly corralled that original attorney as well as our tax accountant to hash through some of the details. Also working with my dad and siblings to understand his desires and priorities. In his mind, ownership should be tightly connected to working in the business. By this time, my brother Julian, who had grown up in the business, had decided to pursue a different path by partnering with his wife to become the fourth generation owners of Kegel’s Inn, a german restaurant that has been in business since 1924. Our youngest sister Tessa, who again had grown up in the business, was not sure she wanted to be part of ownership and was not working full time. That left Amelia and me as the partners. The advisory team strongly pushed for one person in the partnership to have majority share and everyone was comfortable with a 51%/49% split. Our business relies on strong credit relationships, not only with our conventional bank, but also with our suppliers. At the end of the day, creditors seem to prefer a single majority shareholder to hold accountable as it simplifies internal decision making.

In this case, there was no ‘exit’ or ‘retirement’ strategy for my dad. Ownership would pass from him to Amelia and me in the form of a gift at the date of his passing. I recognize that the sort of succession I am addressing here is different from the succession of a shop owner looking to exit day-to-day involvement, while still derive financial reward through a sale of some sort.

This is all important for many reasons, but chief among them is that by developing a succession plan to deal with this type of tragedy allows the family to focus on the family, to allow the space to grieve, to process, to comfort, to attend to all the other important tasks that follow a death. After dad died, we didn’t need to spend any time on the business. We didn’t need be concerned with check-writing, or legal questions, or chain-of-command issues; that was all spelled out in the plan. Once the dust after the funeral, we could then proceed to execute the plan. The attorneys could begin processing the estate, the accountants could do their valuation work, the bank could draft new documents to reassign the credit risk. There was really no disruption in the operation of the business—things really flowed smoothly because we had been proactive and not reactive. That is certainly a credit to the community, the staff, and our business partners—all of whom were willing to step up and support the business through the transition. But it is also a credit to at least having a plan, and having it be clear to all the stakeholders.

In the 18 months since, Wheel & Sprocket has attempted to use this potential crisis moment as an opportunity. When dad got sick, I think it was very natural for everyone to ask: “what is going to happen to Wheel & Sprocket?” I believe when you take many small businesses that have a central character like Chris Kegel that is so strongly identified with the brand, when that person suddenly exits, I imagine many of those businesses really struggle, if not ultimately fail. So given this opportunity moment in crisis, it was important to me to demonstrate to the market, to creditors, to staff that next generation is not afraid. We are going to use this amazing gift as a foundation to honor dad by making the business vital. We’re going to grow and expand, we’re going to step on the gas pedal and reinvest, we’re going to open new locations, and expand on new ways of doing business. And by any measure I think we’ve done that: we’ve opened two new locations in less than a year, we’ve remodeled two existing stores, we’ve started a mobile bike shop service, we’ve opened up an eBike superstore, we’re building out store #10 this year and will move our biggest store to a new development next year. Our company a year from now will look dramatically different than it did a year ago, not only in its geographic footprint, but in our physical spaces, our customer experience, and our organizational structure. 20 years from now, assuming what we are doing is successful, I suspect this period of transition marked by rapid evolution will be recognized as what enabled the company to succeed into a second generation.

On a personal note, I really expected that all of us would have continued to work with dad for many years to come. Over time, he was looking forward to spending more time taking trips and riding bikes. There would be a slow and measured decrescendo as he moved into a more advisory role as me and my siblings moved into more direct leadership. It didn’t work out that way, and literally overnight I found myself in the leadership role. It’s a role that is not naturally comfortable—I enjoy being behind the scenes; the owner has to be out front, the ambassador, the visionary, the one to inspire, and help set strategy. I embrace the role fully, I accept the responsibility, I want this company to be even more amazing than it is now, but it will be a different kind of work for me. I’m up for the challenge.

RECOMMENDATIONS FOR SUCCESSION PLANNING FROM NOEL KEGEL
Key advisors/stakeholders to include in process:
Attorney experienced in business succession to recommend proper legal structures and documentation
Tax accountant to recommend ideal tax treatment
Primary creditors (bank, suppliers). They should be in the loop and I think it’s helpful to ask their thoughts.
Key legal points:
Recommend that majority control vest in a single person.
Life insurance
I think get as much as you can reasonably afford. The purpose of life insurance is to ensure continuity, settle any tax liabilities, give the new owners flexibility to invest back in the business, and calm creditors.
If a current owner wishes to groom a future generation leader, include them in bank meetings, supplier meetings, internal management meetings. In short, include them in anything that an owner has to do. It gives those individuals the repetitions to develop confidence and understanding of the processes, and it gives the other side of the table a chance to meet and develop a relationship with the next generation that helps smooth out the eventual transition.