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Understanding the Importance of Succession Planning

By Generational Equity

10/08/2018

If you own a privately-held business today, I have two questions for you:

  1. Do you have a documented succession plan in place?
  2. Have you run this plan by your trusted advisors? (family, attorney, CPA, etc.)

Sadly, according to a recent article in USA Today, for the majority of small business owners, the answer to both is a resounding no:

“58% of small business owners have no succession plan. Most of those with no plan (78%) blamed their lack of planning at least partially on enjoying ‘managing their company too much to start thinking about a future transition’ while 42% said they were too busy to plan, and 44% felt that succession was ‘too far in the future’ to need to establish a plan now.”

This situation is further compounded by this reality as we have discussed before:

“60 percent of the 15 million privately held businesses in the U.S. are owned by business owners born before 1964.”

This means that about nine million businesses will face some sort of decision about the succession of their company over the next 15 years or so. For the 44% of the owners surveyed who felt that succession is too far in the future, it really is not! The future will be here faster than you can imagine.

It’s Never Too Early to Start Your Succession Plan

These statistics are not only a poor reflection on our business community’s attitude towards responsibility; they represent a dilemma that can be completely solved simply by coming up with a plan.

The issue for many business owners is that they have no idea what their options are or what succession plan makes the most sense for their situation.

Far too many business owners assume one of two scenarios will one day occur:

  1. One of their kids will take over the business, or
  2. A key employee will buy him/her out

Both of these scenarios have serious issues attached to them.

First, have you even chatted with your kids about succession? Too often business owners who attend our exit planning conferences only do so AFTER being told by their offspring that they have no desire to take over the reins.

This leads into another issue: Are you sure your child has the aptitude and/or ability to be a CEO? It is one thing to work in the mailroom, quite another to make the leap to CEO.

Not to mention the insult that could be felt by key employees who have been with you for decades if you hand the company over to your child as your succession plan.

Finally, both of these scenarios carry a huge financial burden to the departing owner. Most offspring and key employees lack the financial capacity to deliver the maximum value for your business.

Odds are good you will have to carry paper financing the deal, which most likely will pay you out over a 5-year to 10-year period. If the business falters under new leadership, what does that do to your payout?

Find Success with Succession Planning: Exit to a Third Party

For these reasons, we highly recommend to business owners that they thoroughly explore a third option for their succession plan: Transferring the business to a third party via a partial or complete sale.

This option is by far more financially lucrative (in most cases) and removes the burden of hoping that offspring or key employees even want to replace you or doubts over whether they’re capable of replacing you.

This is how the USA Today article sums up the situation:

“Everyone dies and many people retire to enjoy the fruits of their labor. Succession is not an easy topic for a variety of reasons. It's hard to confront your own mortality and not fun to tell a family member or trusted employee that they won't be taking the reins as your replacement. Still, it's selfish and dangerous to not address these issues. The best way to control what happens to your business — in many cases your life's work — is to take the proper steps to execute your plan.”

If you find yourself part of the 58% that have no succession plan, then you REALLY need to attend a Generational Equity exit planning conference. These meetings are not only highly educational, but they often give business owners the momentum to begin their exit planning process. This may not even be as clients of ours, but on their own by going home and having frank conversations with family members about the future.

If you have no exit plan or succession plan in place and/or you lack the knowledge about how to even begin, you should consider attending a Generational Equity exit planning meeting. Held throughout North America, these conferences will give you the knowledge base you need to start the journey to achieving maximum value.

To learn more about our conference, use the following links:

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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