Roughly 75% of small businesses don’t have a succession plan, according to Entrepreneur.com
Across central Pennsylvania – as throughout the nation – those numbers are pretty accurate. It tells the story of – how and why – this important business planning tool can become neglected or postponed, according John Stoner a partner at RKL’s Business Consulting Services Group. RKL’s has offices in Harrisburg, York, Reading and Allentown, among other locations.
Leaving a business you’ve spent your entire career building isn’t an easy task. Even under the best circumstances, with willing family or key employees ready to step up and into leadership positions, it can be an overwhelming process.
Three primary components of succession planning involve a discovery process about your business. These key points include:
- Value proposition or what is the business truly worth.
- Candidates to take over the business.
“Too many conversations with new clients [begin with] they want to retire in six months and that’s how it begins,” Stoner said.
He noted it could take three years or more for a son or daughter to get up to speed with running the business.
“Those are hard conversations and you have to have them for everyone’s well being. You won’t do them any favors to hand over a business they [children, new hires or key employees] are not prepared to run,” he said.
For many business owners time spent running day-to-day operations consumes most of their energy. That makes planning for a future they may not eager to embrace isn’t a top priority.
“It’s hard for people actively involved in the business to say they are going to retire,” he said.
Brian Black, a partner and consultant at North Group Consultants in Lititz, Lancaster County, said his company facilitates a “quarterback role for business owners” when putting together a succession plan.
North Group helps businesses grow through leadership and team development, succession planning, hiring and mergers and acquisitions.
“For the business owner who is all in and built the business from the ground up, [they might have] a hard time letting go,” Black said.
Many of the talents and skills entrepreneurs bring to the table like resilience, hard work, persistence and a tendency to be “doers” can get in the way of crafting a succession plan.
“So many people know how to run their business, get outcomes and it’s very gratifying. When they face this idea of transition- they don’t know what to do,” Black said.
For those who see transition in fuzzy or difficult terms, they may not have a clear picture of who they are outside the business, he said.
“Visually, what [does] the succession plan look like? You don’t have to deal with everything immediately” or all at once, Stoner said.
Stoner said of those businesses with a succession plan, estimated to be about 25 to 30%, about 98% of those do not have one that is “executable.”
“For most people it’s their life’s work, and they want to get it right. There is no perfect, way, no easy answer, but there are choices and every exit strategy has plusses and minuses,” Stoner said.
Crafting a future vision of what the business will look like is another aspect of succession planning.
Partnering or bringing professionals in like attorneys, tax firms, consultants and coaches that can help business owners navigate the succession planning process takes the load off the business owner in crafting a plan and creating manageable action steps.
“Understanding the qualities of leadership, what it takes to manage other people, strategic thinking – you have to master those skills or hire people who can provide those kinds of skills. Not everyone is aligned with all of that,” Stoner explained.
In order to focus on the right people for potential succession opportunities in your business, consider and honestly determine candidates who can:
- Understand and have the leadership qualities to run the business.
- Understand the value of human capital, and what it takes to manage people.
- Have the ability to think strategically.
- Have experience or skills to be able to hire qualified employees.
A third-party valuation of the business and its net assets is crucial to developing a successful succession plan.
“A reality check based on valuation methodology, not how big your business is or assets but what is your net value,” Stoner explained.
Because it’s easy to see your hard work as more cash value that it may be, and independent valuation is the best way to determine how much a business is worth.
In addition to valuing the business as it stands financial modeling offers a forward “look see” to assess the profit making capacity of the business, which can provide discretionary profits to fund the succession plan, he said.
“Understand the profit making capacity of your business, it’s not only important in valuing but in managing and running your business,” Stoner said.
“Often it’s a financial transaction. A lot of people look at their bottom line, but you have dig deeper. What is the global cash flow – or what is left over when everyone else [and everything else] is paid,” Stoner said.
That can include working capital to fund regular operations as well as debt service and meeting capital expenditures.
Stoner said strategic buyers ask questions about due diligence and your quality of earnings assessment.
“That’s usually the first reality check. How much value have we created and is it adequate to support our needs,” he said.
Going through this exercise early creates not only a plan but time and a timeline to work toward the plan for a successful outcome.
“Timing is critical. Understanding the realities of your business early [on] gives you time to plan and improve,” Stoner said.
Michael Mitchell is executive director at High Center at Elizabethtown College in Elizabethtown, Lancaster County.
He said the discovery process to create a succession plan is vital because many don’t know where to start.
“It’s a daunting task, and that’s one reason people don’t venture down that path,” Mitchell said.
He said groups like High Center encourage business owners to take a first step. Reach out to other family businesses who have successfully navigated the succession process. Realize hiring professional services along the way to navigate the process is usually in everyone’s best interests.
“You’ll need financial and legal advisers to navigate ownership. Just take a first step,” Mitchell said.
Melinda Rizzo is a freelance writer