Succession planning isn’t just for family businesses and large corporations. Many small business owners don’t plan for what will happen to their companies during a prolonged illness or after their deaths. Unforeseen circumstances could put their businesses at risk of shutting down.
I’ve seen it happen, unfortunately. The young owner of a fashion business who was killed in a traffic accident was the face of the company. In time, that small business did get back on its feet, but a promising tech company did not when its visionary founder died suddenly. With small businesses, owners are often too busy running the company to think about deciding and then putting into writing who will own and operate a business if the owner dies. Without a succession plan, family members and/or business partners can end up ﬁghting over the company in court, draining the company’s finances.
Indeed, according to a recent study, 72% of entrepreneurs have no succession plan in place to handle leadership transitions. What’s more, According to surveys by Wilmington Trust, nearly 80% say they are too busy managing their companies to deal with making a plan. Financial experts recommend that business owners have a plan in place in case of illness, disability or death, and an exit strategy in place if they are planning to retire.
“You can’t predict or plan for every eventuality,” Chris Zimmerman, management consultant with FutureProof Strategies, told CNBC. “Making a point to actively think ahead and plan around uncertainty is becoming an increasingly important principle for any small business owner to embrace in today’s growingly unpredictable business world.”
Planning now for these scenarios is critical for small businesses because it will help avoid a power vacuum, which could lead to power struggles and court fights, and it helps maintain business continuity for your employees, partners and customers.
In a recent global report that surveyed more than 1,800 family businesses, the 2019 STEP Global Family Business Survey, 70% of global family businesses report they do not have a formal succession plan. In many cases, there are millennial family members who are highly educated and already leaders in their firms and ready to take over, researchers said. The report also found that fewer than half – 47% – have a succession plan in case of unexpected events such as death.
Here are some strategies to begin your succession planning, at least for the case of an unexpected illness, disability or death:
Cross-train your employees. Too often, much of a small business owner’s knowledge remains in his or her head and isn’t shared, and in the case of an unforeseen loss or departure this could be devastating to the business left behind. And even if you don’t think you’ll need a replacement in the near future, prepping someone to assume an important role creates an invaluable safety net. Offer mentoring opportunities, job shadowing and training. Open up the lines of communication throughout your small business – your employees will feel more vested in the company’s success.
Do a trial run of your succession plan. A vacation is a great time to have a potential successor step in to assume some responsibilities. The employee will gain experience while you learn how prepared the person is to take on a bigger role.
Succession plans should be in writing — with the help of accountants and attorneys. That will reduce the chances of a court ﬁght, which could hurt the company’s finances and diminish the value of the company. The plan should also include a valuation for the business. Designate a trusted power of attorney.
Involve your partners in your planning. When there are co-founders or partners in a business, they should have a written agreement that spells out what happens to the business when one of them dies.