Absence of a succession plan could be costly and put company future in jeopardy
BY NANCY DAHLBERG
Succession planning isn’t just for family businesses and large corporations. Many small business owners don’t plan for what will happen to their companies during a prolonged illness or after their deaths. Unforeseen circumstances could put their businesses at risk of shutting down.
I’ve seen it happen, unfortunately. The young owner of a fashion business who was killed in a traffic accident was the face of the company. In time, that small business did get back on its feet, but a promising tech company did not when its visionary founder died suddenly.
With small businesses, owners are often too busy running the company to think about deciding and then putting into writing who will own and operate a business if the owner dies. Without a succession plan, family members and/or business partners can end up ﬁghting over the company in court, draining the company’s finances.
Indeed, according to a recent study, 72% of entrepreneurs have no succession plan in place to handle leadership transitions. What’s more, according to surveys by Wilmington Trust, nearly 80% say they are too busy managing their companies to deal with making a plan.
Financial experts recommend that business owners have a plan in place in case of illness, disability or death, and an exit strategy in place if they are planning to retire.
“Our firm helps businesses address foreseeable risks, but you can’t predict or plan for every eventuality,” stated Michael Minton, past president of Dean Mead law firm. “Having a plan for what is foreseeable, can prepare a business to handle uncharted waters.
“And sometimes you do foresee the risk and are well prepared. Who knew over a decade ago when I was president of our firm and adopted the first pandemic plan that it would provide the foundation for our firm’s ability to handle the current COVID-19 pandemic as seamlessly as we have?
“Business succession planning is very similar, and you must address various scenarios to make sure you’ve covered the waterfront of possibilities. It can be difficult for clients to visualize and plan for what seem like unlikely events, and hopefully you’ll never have to implement many of them, but the overall need for the business succession plan is as certain as death and taxes and related to both. Someday your business will need to implement it and if you don’t have a plan, then you have given no direction as what the outcome may be.”
Planning now for these scenarios is critical for small businesses because it will help avoid a power vacuum, which could lead to power struggles and court fights, and it helps maintain business continuity for your employees, partners and customers.
In the 2019 STEP Global Family Business Survey that questioned more than 1,800 family businesses, 70% of global family businesses report they do not have a formal succession plan.
In many cases, there are millennial family members who are highly educated and already leaders in their firms and ready to take over, researchers said. The report also found that fewer than half — 47% — have a succession plan in case of unexpected events such as death.
Here are some strategies to begin your succession planning, at least for the case of an unexpected illness, disability or death:
Cross-train your employees. Too often, much of a small business owner’s knowledge remains in his or her head and isn’t shared, and in the case of an unforeseen loss or departure this could be devastating to the business left behind. And even if you don’t think you’ll need a replacement in the near future, prepping someone to assume an important role creates an invaluable safety net.
Offer mentoring opportunities, job shadowing and training. Open up the lines of communication throughout your small business — your employees will feel more vested in the company’s success.
Do a trial run of your succession plan. A vacation is a great time to have a potential successor step in to assume some responsibilities. The employee will gain experience while you learn how prepared the person is to take on a bigger role.
Succession plans should be in writing and should be consistent with your estate plan — with the help of accountants and attorneys. That will reduce the chances of a court ﬁght, which could hurt the company’s finances and diminish the value of the company. The plan should also include a reasonable process for the valuation of the business. If you designate a trusted family member with a durable power of attorney under your estate planning documents, make sure they know your intentions under the business succession plan so they don’t take steps that are contrary to your intent.
Involve your partners in your planning. When there are co-founders or partners in a business, they should have a written agreement drafted by an attorney that spells out what happens to the business when one of them dies.
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