Business owners need a succession plan

As a small business owner do I need a succession plan?

Asuccession plan allows for the continuation of your business in the case of death, disability and of course for retirement. Many small and independent business owners do not place enough significance on the need.

To help define the need for succession planning here are some statistics to consider: According to the Small Business Association, there are approximately 28 million small businesses in the United States, of which about 22 million are self-employed with no additional payroll. 65 percent of the net new jobs since 1995 were generated from small businesses. Approximately 543,000 new business are started each month but, more employers close down than start up for a net loss of business entities. In 2011 the fastest growing sectors of new businesses included auto repair shops, beauty salons, and dry cleaners. These statistics bring to light, the need for business succession planning.

The auto repair shop provides us with a great example of this need. Let’s say you are a master mechanic and you build up a repair business. You develop good will in the community and have many customers who come to you for their auto repairs. You bring on a customer service person who answers calls, schedules services and processes invoices, etc. Over time you have acquired some expensive equipment, and leased a location to operate your business from. Everything is going great until you become disabled, or pass away early and no one is there that can operate your business. If you have not developed a successor to take over the business, then what do you have? Answer, a building lease which is a liability, equipment you may own or owe someone for which, will either be taken back by the lender or sold for pennies on the dollar. You would likely have many other liabilities as well.

The mechanic has been the driver of the business and without that revenue, you simply have a building and some equipment. Your customers will be looking for another repair shop, the customer service employee looking for another job and your family is in a world of hurt both emotionally and financially.

This can be avoided with a business succession plan. Every small business should have one in place or work on getting a plan in place. As a business owner you owe it to your customers, your family and to yourself.

So you need to develop a plan. The Service Corp of Retired Executives (SCORE) has a five-step process to developing a succession plan. It is simple and pragmatic.

First you need to choose a successor. This is not a decision to be taken lightly. You will want to find someone who shares your values. There may be skills, educational requirements, and licensing issues to consider as well. If you want to pass the business on to a family member ask yourself if you have a family member capable of running the business? Does the family member even want to take over the business?

Second, you will want to develop a training program designed to prepare your successor for the responsibility of running the business. This can be difficult for a small business operator due to time and funding constraints but still a necessity.

Third, you need to establish a timetable for the transition. There will come a point when you as an owner must relinquish control and decision making to your successor. You cannot be second-guessing every decision made. More importantly, your customers or clients will need to be comfortable with the succession plan. Without them there is no business. This transition also needs to be part of the overall company vision and expressed to any other employees who will be effected. You want this to be a positive experience for all involved parties.

The fourth step is to prepare yourself for retirement which we all should be doing regardless if you are a business owner or not. If you are not prepared to retire then the transition will likely be bumpy for all concerned and possibly even fail to take place. Preparing for retirement goes beyond the financial so make sure to consider recreation, travel, health care, etc. when planning.

Lastly, you will install your successor. This is the pinnacle of the succession plan. You have done all the hard work preparing for this day. Now it is time to enjoy the fruits of your labor and give the reigns to the individual you groomed to run the business which you built. As a business owner you pour so much of yourself into the business that it is naturally hard to separate yourself from the business in retirement. This is probably a bittersweet moment but one that should come with great personal satisfaction.

What the five steps from SCORE does not cover, are the options you have in structuring your succession plan. Buy-Sell agreements is the common strategy used and the subject merits a more detailed discussion but, the following is a list of some common strategies used to fund a plan; life or disability insurance, installment sale, selfcanceling installment notes (SCIN), stock transfer, and private annuities.

These strategies can be complicated so work with your team of professionals; legal; financial, and tax advisors to help you put the right plan in place for your specific situation. Your family will thank you. Until we talk again, be well.