Introduction

Small business succession planning answers an important question many business owners either ignore or are altogether unaware that they even need to answer, which is: “what is your exit strategy?” In the United states, small and medium-sized businesses account for the majority of businesses in existence, but many or most of these businesses hardly ever live beyond their owners or founders.

This poses the question, why is so much time, money and effort put into growing a business and ensuring that it is successful, with little to no thought given to the survival of the business beyond its owner, which in itself, can be a step towards ensuring its success or longevity.

This article will discuss the concept of small business succession planning and its overall importance in the life and/or success of a business.

Business succession planning is the concept of planning, identifying, developing, and deciding on a new business owner and/or manager that is to replace the previous owner after he or she retires, resigns, dies, or is otherwise incapable of continuing to run the business. It is a fact of life that human beings are mortal and will cease to exist after spending a certain amount of time on earth. Or that they may become incapacitated by an illness or an accident of some sort. There is however no specific law that says that businesses have to be mortal, and in that sense, a business can in theory live ‘forever,’ or at least for a significantly longer period of time that its owner can. This can however only happen if a proper succession plan is put in place.

Types of Small Business Succession Planning

There are several types of small business succession planning. It may however be ideal to consult with a business attorney to advise what type may be best suited for your particular business and the environment which it operates in.

Having said that, some of the most common types of small succession planning include:

Inheritance

Small businesses can be passed on to the heir or heirs of the owner or founder via inheritance. In this instance, the heir may inherit the business if it is stipulated in the will of the owner, or where the person dies intestate, the business may automatically pass on to this heir according to the intestacy laws of the particular state where the business is located.

This may be the easiest type of succession planning but it can often be detrimental to the business if the heir has no clue or idea on how to run or manage the business. In this instance, the business can potentially run into trouble which may eventually lead to its liquidation or winding up.

BuyOut

A business can outrightly be sold to persons or companies outside the organization, as a way for the owner to exit the business while ensuring its continued existence. In this scenario, the owner will likely have conducted a proper evaluation of the business to determine its worth, while also conducting some due diligence on the potential buyer to ensure that they have the capability and other resources to ensure the continued survival or existence of the business.

Of course there may be many other things that need to be taken into consideration regarding an outright sale of the business, and only the owner, perhaps in conjunction with other employees or stakeholders can come to the determination of whether this is the best succession option.

This buyout arrangement can usually happen with a business partner, employees of the business, the general public or even a competitor.

Sale of Ownership Interest

In situations where the business is registered as a corporation, the owner may decide to sell some or all of their stake in the business to one or more stakeholders. This is yet another way in which the owner can divest themself from the business, in the hopes that the new stakeholders will do everything in their power to ensure that they see a return on their investment by keeping the business alive, even after the original owner has completely exited, or reduced their shareholding.

Transfer of Management

The management of a business can be transferred to key and trusted employees as a way to maintain continuity after the owner(s) exit. For this transfer to be effective and successful, the owner will likely have spent some time deciding on exactly which employee(s) to transfer this management mantle to, training and preparing them for this eventuality, and making sure all other processes, legal and otherwise, are put in place to make this happen.

In such situations, while the ownership of the business might transfer to the heir(s) of the owner, the management thereof will transfer to existing employees, who are already knowledgeable in the running of the business, thereby increasing the chances of the business’ survival after the owner has left it.

The Importance of Succession Planning

Without a succession plan, there will often be a lot of uncertainty that surrounds a business in the event of its owners’ exit, moreso if that exit is sudden and unplanned. This is particularly true of single-owner businesses. Multi-owner businesses, on the other hand can sometimes be shielded from this uncertainty, as the other owners will often carry on running the business if one owner exits.

For a single owner business, the chances of the business’ death is very high when there is no succession plan, and various statistics offered up by different research papers seem to suggest that the high death rate of small businesses, is in part attributable to an absence of an exit plan by the business owner.

Given the importance of a succession plan for the survival of a business, it can often be a good idea to include necessary or select family or relatives in the process, while of course seeking experienced legal advice where appropriate or needed. Even if these family members might not inherit the business after your demise or incapacitation, it is still a good idea to keep them informed, if only so that they can ensure that your wishes are properly carried out after you are gone.

Below are a few specific benefits of small business succession planning worth mentioning.

First, a succession plan can often ensure that a specific program is put in place for the proper training and development of the human capital that may potentially take over running of the business in future. This professional development can take one or more of several forms, including; job shadowing, mentoring, coaching or a gradual increment in management responsibilities, either of which will go a long way in preparing the individual(s) for the role when it comes, and ensuring a smooth transition.

Similar to, and continuing from the previous point, a succession plan helps a business (owner) actively take note of, and be aware of employees who exhibit traits of being capable of taking over management and/or leadership of the business in the future. Without the existence of such a succession plan, the business owner would perhaps be more likely to simply see such person or people as being good or hard working employees. An active succession plan can, on the other hand, rather make the owner see the employee in terms of; “I think she/he might be the best person to take over from me,” therefore allowing ample time for corporate knowledge transfer.

A third benefit to be had from a good succession plan revolves around tax benefits that can accrue either to the business itself, or to the heir(s) of the owner who inherit the business. Many states in the U.S. have their individual inheritance tax laws, including the federal government. A good inheritance plan which has factored in this tax burden, can sometimes, with the help of a qualified accountant or tax attorney, find creative ways to minimize the payable tax on the inherited business, which can sometimes prevent the business and/or new owners from getting into financial difficulty, which may consequently affect the business’ survivability.

Perhaps the most obvious benefit of them all, is that the business can continue to live on. This is obviously the main reason and intention behind the plan, and more often than not, depending on the quality of the plan, the objective is often realized. This can then allow the business owner to have less worries about what will happen to the business for which he or she has worked so hard on, after he or she or she is gone.

In Conclusion

There are more instances where the importance and benefits of a small business succession plan can be highlighted, but suffice to say that the few mentioned above should hopefully be enough to encourage and convince any small business owner that it really is in their best interest to not delay in working towards drawing up this plan.

Bio

Kanayo Okwuraiwe is a startup founder, an incurable entrepreneur, a digital marketing professional, a chess lover, a brother, a son, a friend and more. His latest project has seen him create a digital marketing agency called Telligent Marketing that provides law firm SEO services to help lawyers grow their law practices.