Succession Planning

MoneyWatch for November 2007
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Ninety percent of all U.S. businesses can be categorized as small businesses. According to the Small Business Administration, only thirty percent of these small businesses succeed after the first passing of the company from the original founders. Even more astounding is that only fifteen percent survive the third generation of management. These numbers show the importance of succession planning, especially for small business owners.

Succession planning refers to the creation of a plan to define who will take over control of a business when the owner retires, and how that transfer will take place. This task is becoming more challenging as baby boomers are getting ready to exit the workforce. Many of these employees have been with the company for many years and their retirement leaves a gap in the number of qualified personal. This is one reason why the process of succession planning can be so difficult. Business owners must train and develop employees early on so that when there is a vacant management position someone is ready to fill it immediately. Continuous development will assist in retaining good employees and could potentially increase the number of eligible people to consider as a successor.

In preparing for succession there are many questions a business owner should ask themselves. Start with the following:

How old are you, and when do you plan to retire?
Do you want to keep the business in the family? Have your children been exposed enough and if so, do they have leadership abilities?
In the event of a sale, have you planned the management of the proceeds?
What continuing role, if any, do you envision for yourself?

After a decision to create a succession plan has been made, you must choose the right strategy for yourself and your company. Whether you decide to transfer ownership to one of your children, sell to current partners, or sell to a competitor, you should look at all the factors involved. The following are some of these:

Your business strategy, and financial needs after retirement
The presence of co-founders or partners in the company
The existence of employees who may be interested and ready for ownership
The value of your company if you were to sell to an outside person or company

Succession planning is a very long and complex process. To effectively do succession planning, one must identify the organization’s long term goals, and hire superior staff. Because of the hectic schedules of business owners it is often overlooked and pushed onto the back burner. Many experts agree that the best way to approach it is to assemble a team of succession planning experts. This includes lawyers, accountants, and financial advisors that can assist in defining objectives and developing a plan.

Local Resources:
Crain’s: Succession plans must address both management, owner shifts
Crain’s: Succession planning still crucial for biz
Kent State University: Succession Planning Program
Cleveland Leadership Center: Building a Pipeline of Emerging Leaders- A Resource Guide

National Resources:
SBA: Transfer Ownership
Score: Developing a Succession Plan
National Federation of Independent Businesses: Why Consider Succession Planning?

Support for MoneyWatch is made possible by Charter One Foundation.

Research assistance for MoneyWatch is from Cleveland State University Nance College of Business Administration. Information on the Nance MBD program is available here.