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THE TRUTH ABOUT SMALL-BUSINESS SUCCESSION
PLANNING
Of all the things facing a man or woman from the moment he or
she becomes chief executive officer of a large company, few have
a higher priority than determining who will succeed him or her
when it becomes necessary.
This is critically important for a large public company with
thousands of employees and thousands upon thousands of
stockholders. It is no less important for a small company with
relatively few employees depend on it for their livelihood.
While large companies typically have board committees and/or
staff whose sole responsibility is to develop and implement
detailed procedures for identifying potential CEO's both within
and outside the company, small companies usually have less
structured practices.
They may be as simple as choosing an obvious candidate, such
as an only child of the founder or, perhaps at least on an
interim basis, the most senior employee if the child is too
young. "Though inevitable, succession is often the least
planned and, consequently, the most perilous event for a family
business," the U.S. Small Business Administration asserts
in a paper entitled Family-Owned Business Success: Leveraging
Advantages and Mastering Challenges. "History has shown
that only one in three firms will survive the transition to the
second generation. Only 10 percent of the original group will
survive into the third generation of ownership."
Given the increasingly complex challenges that small and
large businesses alike face these days — whether from government
regulation, international competition, new technologies, rapid
obsolescence of products, or other factors — simple procedures and
searches limited to family or current staff may no longer
suffice. In order for a business to have a future, serious
issues must be addressed and answered over and over again, often
with the help of a financial planner or adviser who can help a
business owner through the process. Among these are:
- If a family member is the obvious heir
apparent, is he or she really able and willing to handle the
job for the indefinite or possible immediate future?
It's never too early to start training a
successor from within the family, the SBA points out.
"By elementary school age, youngsters can stuff
envelopes and help with office housekeeping chores. As they
mature, their participation can grow accordingly. Experts
also recommend that the incoming generation work in the
broader business world before permanently joining the family
venture."
- If the obvious heir apparent is not the best
choice, is another family member, perhaps not previously
considered, better able and willing to do the job? The
decision must be based on the ability of whomever is
considered to do the job well, not based on age,
relationship, gender, or education. "Separation of
family relationships and business is especially essential at
this juncture," the agency advises. "The decision
must be based on qualifications regardless of family
dynamics." Business owners also need a backup plan
should the family member or other heir apparent fail to run the
business appropriately.
- If no family member is able and willing to lead the
company for the foreseeable future, does it make sense to
look elsewhere within the company before going outside, or
does it make more sense to sell the business?
- In the former case, would the most senior employee
necessarily be the best qualified candidate or would a
younger one be a better prospect?
- If no employee is qualified and willing to lead the
company at this point in its history and it would become
necessary to go outside, would current employees who
considered themselves to be eligible become sufficiently
disappointed, risking the loss of their experience?
- What sort of compensation and benefits package
would it take to attract a suitable candidate, and can the
company afford to offer it?
- If the compensation package were to involve equity,
does anything need to be done to facilitate consensus among
current owners to accept the arrangement? Business owners will
need to determine the value of the business as part of any
succession planning exercise. Likewise, owners need to structure
the sale of the business to children or other successors.
- Given the importance of retaining principal current employees,
what plans must be made (a) to properly communicate to them the
rationale for going outside and (b) to enhance compensation
and/or benefits to keep them? "These key players need
reassurance that they have a place after the incumbent
retires," the SBA stresses. "Conversely, incumbents
need to help them understand that they must enthusiastically
support the succession process and the incoming
leadership."
Recommending that family businesses should begin to plan for
succession "a decade or more" before the events, the
SBA explains, "Having time to discuss issues and options
will increase the odds for success while building family
acceptance…
"Once the succession process is put in motion, the
family needs to set a date when the retiring owner cedes full
control to the new leadership."
Retiring founders need to prepare themselves for the changes,
too. They will have to move from a time in which their
businesses were their lives, where most of their friends were
business associates, and where they had few outside interests to
a time in which they may find fulfillment elsewhere, perhaps
mentoring, or serving non-profit organizations, charitable
organizations, or other businesses. Some may want to start all
over again, founding new businesses in new fields.
May 2006 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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