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:

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, a membership organization for the financial planning community, and is provided by Terry Green, CFP, AIF, a local member of the FPA.