Succession Planning: Problems Getting Started

A survey released by the American Institute of Certified Public Accountants in the spring of 2005 illustrates a widespread problem on the lack of succession planning [deciding who will take over running the firm when the current managers die or retire]. The survey found that 60% of responding certified public accountant (CPA) firms have owners who are in the 55-to-62-year-old age bracket, and more than half (56%) have at least one partner who will retire in the next five years. However, according to the survey, 81% of these firms still do not have a written succession plan in place. Among those firms with annual revenues under $150,000, the percentage rose to 96%. If we polled small businesses in other fields, the percentages would be comparable: around 80% of small business owners have no succession plans.

Similarly, the Canadian Federation of Independent Business (CFIB) reports about 40% of small and medium business owners in Canada plan to leave or retire in the next five years, and 70% plan to leave or retire within 10 years. However, roughly two-thirds of the 4,300 Canadian businesses that responded to the federation's survey have completed no succession planning. Small and medium businesses account for about half of the jobs in the Canadian economy, and potentially more than two million jobs could be at risk to inadequate succession planning.

For many of these small and medium business owners, the practices they have built up are their most valuable assets as well as their primary retirement assets. But these owners believe they have plenty of time to arrange for succession. Many business owners put off dealing with succession because it is the least urgent matter on their plate. Too often business owners cannot stand the idea of letting go of an entity they created and for which they toiled to achieve success. Apparently, these small and medium business owners need assistance both in formulating plans and in actual transitioning to future managers and owners of the firm.

Succession planning, like tax planning, is just good common sense and should be a natural part of good business practices. As soon as business owners take out life insurance policies to protect their assets for dependents left behind, they need to think of succession planning. If business owners have children who do not wish to follow in their parent's business, then the business owners need to think realistically about the price they would be willing to sell the business to outsiders. In one sense, these business owners who plan to sell to outsiders are lucky that they can avoid the emotionally divisive issue of having to select a business heir from competing adult children or competing managers.

Succession planning would not be needed if the owner intended to wind down operations upon his retirement, but only 4% of the Canadian small and medium businesses that responded to the CFIB plan to close down their firms. The response from American small business owners would probably be similar. Yet without adequate succession planning, the firms could be in disarray upon the owners' retirement and unfortunately the businesses might fade away.

Inevitably, succession planning forces many owners to agonize over whether to pass on their business to family, employees, or a private buyer. They also worry about selling at the right price and finding a buyer who will treat the business and staff well. All of this planning occurs at a time when they are considering retirement and the other changes in their life that will occur when they are no longer running a business. As a rule of thumb, business should start developing a succession plan at least five years before the owner hopes to step aside or as soon as the corporation acquires capital assets with significant value. It can take up to two years to sell a small business.

About 30 per cent of successions feature the previous owner advancing a loan or seller financing to the buyer, because small business bank loans are difficult to get from a bank. When there are no family members interested, small business owners should consider handling their succession through life insurance. But few small and medium business owners have that kind of foresight.

Dr. Michael A. S. Guth, Ph.D., J.D., is a risk management consultant and practicing attorney at law based in Oak Ridge, Tennessee. In addition, Dr. Guth is a financial quant and former investment banker, having worked for Credit Suisse First Boston and Deutsche Bank in London and Frankfurt. He specializes in developing investment strategies and strategic plans for small and medium-sized companies, as well as mergers and acquisitions for large corporate clients. For five years, he consulted to the electric power and gas industry in the USA, and even managed the Middle Office (financial risk control) groups for two trading floors.

Dr. Guth has taught over 30 courses on-line at the undergraduate and graduate level on topics ranging from Managerial Economics to Strategic Management to Business Law. He can be reached through web page http://riskmgmt.biz/economist.htm

In The News:

Strategic Plan  Bethel College, KS
Seton Hall Unveils Strategic Plan  Seton Hall University News & Events

Do You Have A Customer Identity Crisis?

The trick is to determine what uniquely identifies your best... Read More

Business Disaster? Wont Happen to Me

As fast as you can say business disaster, your business... Read More

Thinking Like A Farmer

One of the difficulties we face in our industrialized age... Read More

Mining Market Data

With a heightened awareness of opportunity, ideas can often be... Read More

3 Undercover Ways to Make Big Profits from Your Competition

You have heard that there is extra money on the... Read More

Idaho Market for Automotive Businesses; Doing it Right

Anyone who has been watching the Idaho Market Carefully for... Read More

Break-Even Analysis

A significant advantage of some business ideas is that the... Read More

Turning On The Lights

Fun From The StartFor those with the will to start... Read More

Don?t Just Talk About the Weather, Use It to Advantage

A well known, national chain of restaurants discovered that certain... Read More

Strategic Planning Fundamentals

Strategic planning is vital while starting a new business or... Read More

Sony?s PSI Project

In 1989, Sony founded its Institute of Wisdom at the... Read More

Three Steps to Give Your Strategic Plan Traction

We all agree Strategic Planning is a critical part of... Read More

Microsoft Great Plains in Aerospace & Defense industries ? implementation & customization highlights

Microsoft Great Plains fits horizontal markets clientele and in case... Read More

Executive Summary for Business Plans of Franchisees

Writing a business plan for a franchised outlet of a... Read More

Why Create an Annual Plan?

Can you imagine going on a road trip without knowing... Read More

Family and Friends Referrals Make the Best Franchisees

As a franchisor it is imperative that you seek, find... Read More

TQM Total Quality Management, the book

Every decade we seem to come up with a buzz-word... Read More

The Power of Strategic Thinking: Creating Meaningful Success

Too much goal setting and strategic planning can leave you... Read More

19 Questions to Supercharge Your Business Plan

Whether you are seeking capital for your company or are... Read More

Building a Better Brick-and-Mortar with the Billion-Dollar Web

More than $117 billion passed hands from Internet shoppers to... Read More

Be Like Bill - Think!

Twice a year, Bill Gates goes to a remote island... Read More

A Backup To The Internet Is Vital & Now Cost Effective

It doesn't take a Terrorist Act, Tsunami or Earthquake to... Read More

Abstract Thought; Business Strategies and Biological Systems

To stop a computer virus you must understand how it... Read More

5 Strategies That Will Boost Your Business Productivity Today! - Part 1

Building a dynamic small business is a constantly evolving, increasingly... Read More

Alice In Wonderland - A Parable for A Business Plan

Remember reading "Alice in Wonderland?"She asks the Cheshire Cat, "which... Read More