By: James R. Gillen, VP, Chief Marketing Officer at ESSA Bank & Trust
If you run a successful small business, it’s quite likely that your company is your most valuable asset. There no doubt your success is the culmination of hard work that started from an idea, maybe the result of numerous iterations of a business plan scratched onto a pad that blossomed into your successful venture. Hopefully, the value you build in your business will provide a lifetime of success and wealth; and that ultimately, the value you’ve created will go beyond your lifetime.
But what happens if you die tomorrow?
What happens to your business, your family, your plans, if all of a sudden you are not around? How about if you simply want to retire? Will your family be secure and will your business be able to continue to provide for your family just as you planned? Hopefully you’ve thought about these questions and have a good sense of the answers. If not, you’re not alone.
According to a Wilmington Trust study of 200 privately held businesses, 58% of small business owners have not created such a plan, even though creating a plan generally results in higher business valuations, lower taxes, and a bit more of a sense of calm for stakeholders.1
And most of those with “no plan” (78%) attribute this lack of planning to their enjoyment of running the business, saying essentially “who has time for that now?” Their thought being that actual succession was too far into the future to cause concern today.
So let’s start with a brief definition and some purpose.
The succession plan’s purpose is to create a blueprint for transferring your business to the next generation of owners or managers. Without such a plan, you have heightened risk that the company value could diminish due to the absence of a seasoned senior executive to lead. This is one reason why a minority of family businesses survive the passing of the founder. According to the Harvard Business Review article “Generation to Generation: How to Save the Family Business” only about 30% of family businesses survive into the second generation. 2
Further evidence suggests this trend will only continue. According to a Price Waterhouse survey3, within the family-run business universe, those who anticipate an ownership change in the next five years are thinking less about passing on to family heirs, and if they do, are thinking there is a much greater likelihood that family members will not run the businesses.
With expected ownership change in the next five years:
In 2012, 52% indicated they would pass on to the next generation to own and run, reduced to 41% in 2016.
In 2012, 24% to pass on to the next generation to own, but not run, reduced to 11% in 2016.
In 2012, 12% indicated they would sell to an outside party, increasing to 30% in 2016.
The Price Waterhouse survey found that of those who had a management succession plan in place, only 30% felt their plan was well documented and complete.
Why don’t more business owners plan ahead?
There are lots of reasons. Time, for one. When you are busy managing the day-to-day of your business, how can you find the time to develop a strategy for succession? Already stretched to the limit, do you really have time for thinking seriously about what would happen to the business if something were to happen to you? Well if you don’t, you should make time.
Even though many small business owners see succession planning as a task that can wait, the truth is that starting to plan can provide more options, more control, and a better chance of a successful transfer to the next generation (if that’s your desire). The process can take time and could easily evolve into an ongoing process of review and adjustment.
So maybe it’s a good time to start thinking about the future, even if the “future” is quite a way down the road. Remember, each stage of progression in this process can make your company less vulnerable.
1 The Power of Planning, © 2017 Wilmington Trust Corporation
2 Boris Groysberg and Deborah Bell, “Generation to Generation: How to Save the Family Business”, 2014, Harvard Business Review, https://hbr.org/2014/04/generation-to-generation-how-to-save-the-family-business
3 Source: PWC’s Family Business Survey