Small-business owners need to craft a succession plan before somebody else takes over for them.
[dropcap]Y[/dropcap]ou had a dream to run your own business, and you made it happen. It was your sweat, your tears, your time, and your money that propelled your vision to life. You did it, and it’s all you’ve ever wanted. And now, the best thing you can do for your dream-come true is to think about who can do it instead of you. If that last statement caused you to drop this publication in your lap, you’re in good company. Few small-business owners think about or prepare for the possibility that they’ll step aside because they want to, or have to. A recent survey by the enver-based Financial Planning Association found that fewer than 30 percent of small-business owners have a written succession plan in place.
There are plenty of excuses: Some are too busy, others are uncomfortable with the idea; nobody wants to envision someone else in their shoes, or plan for their own demise. But working without a net is not a recipe for success, and could leave you with a view from the top as you watch the bottom fall out of your dream.
Last Things First
Most people don’t think about an exit strategy on their first day of a new venture, but a small-business owner should have the endgame in mind from the get-go, say experts.
“You need to create a succession plan before you even start your business,” according to financial planner Carl Bagell, a managing partner with Friedman LLP in Marlton. “A year in, or on day one, you could get sick or hurt, or worse, and your efforts, your assets, will go up in smoke if there is nothing in writing detailing how you envision your business operating without you at the helm.”
Bagell says a good rule of thumb when starting a business is to “think about the end at the beginning.” While it may be way too soon for many small-business owners to know who will succeed them on the day the shingle goes up, that is precisely the time to document what to do.
“Does your wife, next of kin, or a trusted friend know, for example, who your accountant is?” asks Bagell. He says a succession plan is about much more than simply deciding who can pick up where you leave off. Instead, “it’s about preparing your family or that reliable associate to handle your business, even if that means selling it, if you are suddenly unable to [run it].”
A Punch to the Pocketbook
The financial implications of flying solo without a plan in place are huge, says Scot Pannepacker, a financial advisor and partner with Lear & Pannepacker in Princeton. “A written succession plan is crucial for not only the succession and continuity of the business, but for the financial stability of the business owner’s family.” He says this holds true if, “say, a business owner’s retirement fund is fueled by company profits, and his wife relies on retirement income for her livelihood.” The very foundation of the business could start to waver if the owner suddenly goes out of commission, and if no clear path forward has been established and put down on paper. A business owner may be self-sufficient, but his or her employees count on that store opening its doors every day. Says Pannepacker:
“To get overwhelmed by this kind of planning and do nothing is a disservice to those who have been working to keep the business afloat.” There must be some kind of written documentation about what to do if the driver, without signaling, moves to the backseat, he says. “Otherwise, you could unintentionally put your trusted, valued, and much-loved employees out of work.”
Changing of the Guard
Pannepacker says that such planning needs to take place at the formation of the business, but points out that the task of picking a successor takes time. “For starters, there needs to be, at the
least, some plan for authority and decision making in the business to allow it to grow,” he reports. “This often leads into succession planning.” Once a business is mature and has reached a point of sustainability — which could be as early as five to seven years, but is usually more like 10 — a business owner
should begin crafting an official plan for someone who can take over the reins, he advises.
“It’s a tough and weighty decision; but slowly, over time, the person with the greatest inclination and aptitude will begin to outshine the others,” Pannepacker observes.
This rising star should then become a focal point of the succession plan, and the lengthy grooming process can begin. Pannepacker says it’s important to set a limit on training, and establish a timetable for shifting control of the company. “Both the boss and the heir apparent need to know who is in charge of what and when,” he advises.
Also, while it’s never a good idea to make promises too soon, it’s critical that this employee realizes there is a place for him or her in the business over the long haul. “An ambitious person needs to be rewarded and given incentives to stay on,” says Pannepacker, adding this can be accomplished through compensation, setting personal goals, and offering opportunities for growth. “They can never perceive there is a ceiling in the company.” A well-designed succession plan is particularly important in a small business where the employees are family.
“Often times, people of different generations have wildly different expectations for the business,” says Pannepacker. “Sharing control across generations can lead to conflict.” This kind of discord can be greatly minimized — perhaps even eliminated — by having a plan, in writing, that details how the business is to be managed if there is a sudden shake-up at the top. “This will go a long way towards keeping peace and harmony in the family, and ultimately, in the business, which is in everybody’s best interest,” he notes.
So, is it enough for a small-business owner to take an afternoon to jot down ideas for business succession and continuity, and set them down in a will or estate plan? Experts answer with a resounding NO. “Finances play the biggest role in succession planning, because the business has to stay profitable and viable for the employees and family members who depend upon it
for the next generation of leaders; or in the case of an outright sale,” says Pannepacker. He and Bagell each strongly say that business owners should create a comprehensive succession plan with the assistance and guidance of a financial advisor or attorney. Pannepacker cautions, though, that “an accountant can draft a plan, but only a business owner can make it happen. You can’t delegate the succession plan.”
Such professionals can also be invaluable in helping small-business owners ease the tax bite of passing on or selling their businesses. There are always tax considerations, says Pannepacker, but with a smaller business they may be less demanding. “As a business grows and gets larger, tax issues become more urgent because it may not just be the hand-off of the business [needing
attention], there may be income tax and estate tax considerations, too,” he says. There are always ways around this, though, and they vary like the myriad of pods for the office Keurig machine. “An accountant or attorney who specializes in tax law will be able to offer options for every scenario.”
CLEAN UP YOUR ACT
But the best-laid plans won’t count for anything if disarray lurks in the corner office or under the desks. “You need good, clean books,” advises Alisa McCabe, a small-business consultant at
First Steps Financial in Hamilton. “If you’ve hired a firm to help you craft a succession plan, they won’t be able to gauge the value of your business if the books are a mess or inaccurate.”
Processes need to be well done and written down, she adds, especially if you’re about to sell. “And, in the case of passing a business on to next of kin, you want to give them a gift and not a headache.”
Linda Ialacci, an accountant affiliated with Alliance Wealth Management Group in Flemington, echoes this concern: “Succession planning involves making sure the business processes are well documented, the key staff members are trained properly, and the vision for the business is not solely in the business owner’s head.” Pannepacker agrees, and adds: “If the endgame is an eventual sale, the goal of the succession plan is to make the business as saleable as possible. A business owner really has to develop the people, the talent, and ensure that they share the same vision for the business.” Otherwise, he says, it’s very difficult to get someone to step in and change his or her outlook from that of an employee to that of an entrepreneur.
SAFE TO PROCEED
Just as no two people will ever build and operate their businesses in the same way, one size will never fit all when it comes to crafting a succession plan. “There is no magic bullet or overnight relief,” says Ialacci, noting that’s why a business owner needs to seek expert assistance, and set aside sufficient time, energy, and focus to draw up a solid plan and put it on paper. Once a well-conceived succession plan is nailed down and a successor has been chosen, a small-business owner knows that an eventual transfer of power will be relatively seamless. It may be bittersweet to watch your dream come true for somebody else, but you will be able to revel in the satisfaction that you made it happen, and you were the one in control of that destiny. You also did everything in your power to keep your dream from falling through your fingers until the exact moment you were truly ready to let it go.