Succession Planning: An Oft-Neglected Component of Running a Small Family-Owned Business

Small businesses form the foundations of the U.S. economy. But they’re also often woefully ill-prepared for transitioning ownership—even though almost all will eventually undergo a transition. Poor preparation can harm the business, its staff, and everyone who stands to profit from a transition. Here are some considerations owners must undertake.

 

Do the owners understand the business’s fair market value?

The answer is almost always no. Owners tend to be excessively optimistic and emotional, viewing the business as far more valuable than it is. This makes it difficult for them to hear that the business is not as valuable as they hoped.

 

What steps have the owners taken to prepare for a change in ownership?

The statistics are grim. Only a quarter of businesses have a clear transition plan in place. Nearly a third have no plan at all. Asking an owner to plan for a future in which they no longer lead the business can be challenging. The next generation might not want anything to do with the business, and senior leadership may have no plans to take the business over.

 

Strategic advisors can help get the business on the right path. The two sides can work together to create a multi-year plan for an ownership transition. Some guidelines that may help include:

  • Reach out to a handful of advisors who specialize in your industry. You might find that different companies are best equipped to advise you and then value and sell the business. Sometimes a hybrid approach is best.
  • Seek an advisor who can provide you a fair market valuation. You’ll need to understand key value drivers so you can maximize the business’s value.
  • Create and then implement a succession and strategic growth initiative several years before you plan to transition. It’s best to begin the process three to five years in advance of a sale. In some cases, an even longer timeline may be ideal.

There’s no denying that transitioning a business can be stressful. An expert advisor can identify and correct key problems. Expert advice allows you to implement a workable succession plan. It also ensures that all aspects of the business, including financial, employee, tax, and other considerations, are addressed in a way that maximizes value and effectively markets the business. Choose that advisor wisely so you can ensure they have your best interests at heart.