Succession Planning
Perhaps no issue is more sensitive for small businesses than the matter of succession planning. Aside from the accounting, financial and legal complexities that are involved, succession planning is a wrenching psychological exercise.
It's often all about family dynamics, relationships between owner-operators and employees, the deeply ingrained work habits of a lifetime and a growing sense of one's own mortality. People become so emotionally attached to their businesses that they just don't want to let go. If they start the succession planning process, it means implicitly that they're starting to let go. Most business owners see this as the beginning of the end for them.
This may help explain why so few small businesses do a good job of succession planning. And of those who have, most don't bother to write them down. The majority of owner-operators prefer to concentrate on today's problems, reasoning that they'll worry about tomorrow when it comes.
But given the high stakes, the tendency of small business owners to defer planning their exit strategies is worrisome. The very survival of a business is at risk, with implications for employees, the economy as a whole and for the owners and their families in particular. A lot of the time the business represents a good chunk of the retirement savings of the business owner so there's a vested interest in ensuring that the business continues successfully. We've also found that when there is a succession plan in place, the business has in fact grown quite successfully.
While there's no one-size-fits-all template for succession planning, there are some basics that both Bruce and Bergeron think you should consider if you own a small business. In logical order, they go like this:
Plan early and often
Ideally, you should begin succession planning three to five years before the event. In theory, a team of outside planning consultants could help you put together a plan in a matter of months, but it's better to allocate a few years because of the challenges a business faces when making such a major transition. For example, you may need to set up a family trust or create a holding company, actions which can literally take years to do properly. If yours is a family-owned firm, you'll likely need time to bring your children into the business and, assuming they're interested and capable, expose them to different aspects of the operation and train them to take over. Management transfer takes time. You have a person who has been in place for 30 years with all that accumulated knowledge and you bring in a new individual who's fresh. While the newcomer may have some experience, they're not going to catch up to 30 years of experience in six months. Nobody is able to do that.
Succession planning should be incorporated in the normal business planning process, in part because it anticipates what might happen if you were to die accidentally or were incapacitated for a long period and unable to work. It should just be part of proper human resources management. It's contingency planning that you should have in place so that you can deal not only with short term things, but face issues such as how you will transfer knowledge and how you can protect your assets, especially in an age when a lot of your competitive advantage is your human capital.
Set your objectives
It may be emotionally difficult, but the foundation of succession planning is setting your own objectives. Like some 80% of owners who leave their businesses, you may want to retire outright. Others may want to remain in a limited role, such as running a particular aspect of a business, or sitting on advisory boards where they can mentor their successors and keep an eye on the business whose ongoing success will pay their pension.
It's also important to consider the way ownership of your company will be transferred. In a family firm, the most obvious choice is to bring in children to take over, but you might decide that your offspring aren't right for the task and that a better alternative is to sell the company to management, employees or even to a competitor. Yet another alternative is simply to wind a company up by systematically selling off the physical assets and then locking the door. For many small service companies such as restaurants, that's very often what happens.
However you wish to proceed, it's important to be clear-headed. One of the common mistakes people make is to have most of their retirement assets in the business and then to leave it in the hands of children who may not be the most capable to run it. The owner might be better off to sell out, get the money and then give a portion of it to his children and save the rest for retirement.
Enlist professional help
If your business is of any significant size, you will require help doing a succession plan. You'll need an accountant to advise on the tax planning and personal financial planning aspects of succession. There will likely be consultants to help you establish the market value of the business (something which is often overlooked but which can produce ugly surprises if an owner overestimates) and business brokers to help you structure a sale, connect with potential buyers and draft a prospectus and accompanying documentation. Finally there will be financiers, anyone from well-heeled relations and venture capitalists to plain vanilla bankers, to put up the funds for a deal. All this will cost money, but the amount is likely much less than you stand to lose by trying to do it alone.
Consider the tax implications
Seek professional advice from a tax lawyer or tax accountant.
Communicate your plan
Whatever shape your succession plan takes on, it is vital that you communicate it effectively - to children, other relatives, managers and employees. Small firms are as much and perhaps more susceptible to pride, envy and jealousy than are larger corporations, argues Bruce, making it smart to let people know how succession will work well in advance, giving hurt feelings time to heal. He can also think of several instances where a company owner had chosen a successor, but hadn't bothered to tell the lucky person. When a succession plan isn't communicated, there can be unpleasant surprises.
Adapted from an article by Charles Davies, June 2006