Small-Business Succession Planning: What You Might Be Missing

by Thomas Mengel

Most small-business owners know what they want to happen when they retire. However, because of misunderstanding or maybe just not getting around to it, many do not have a complete and up-to-date written succession plan. In fact, a recent survey conducted by CNBC, in conjunction with the Financial Planning Association (FPA), puts that figure at a mere 30%. This is despite the fact that proper succession planning is the best way to protect one’s investment in a business.

Some of this is the industry’s fault. Industry writers often run together two types of succession planning: the transfer of power and the transfer of assets. Protecting your business requires both.

Too often, succession plans are incomplete (or are not updated in a timely manner) simply because an owner felt the plan was adequate – yet was simply misinformed about everything that was needed.

We have seen cases where an owner went to sell her business to fund retirement and found that, although the general manager could run the business, there was no clear plan for finding a buyer, valuing the business or dealing with the tax implications. Or where an owner had taught his sons the ropes, grooming them to take over – only for them to find out, after his death, that the company transfer wasn’t properly structured to avoid probate.

A succession plan that lays out the transfer of power outlines who is going to run the company once the owner steps out of the business. This part of succession planning involves identifying the leadership potential of people within the company and/or determining the skills, attributes and qualifications to look for in external candidates. Based on this information, a plan that specifies promotions and job-filling procedures to ensure a continuity of leadership is put into place.

This is different from a transfer of assets, which gives full or partial ownership of your business to family members or other insiders. Though this sometimes happens upon the owner’s death, it more frequently happens when the owner is ready to retire and wants to “cash out.” This plan is critically important because typically, most of an entrepreneur’s cash is tied up in the business. Without the right amount of liquidity, an owner cannot sustain the budget.

So, if you are planning to leverage your business to provide for yourself and your family, during retirement or after you are gone, you will be best protected if you make sure both kinds of succession planning get done.

And once a plan is in place, it is wise to revisit it every year or so, depending on your circumstances. Tax laws change, and your business changes too. Which means you will need to take the time to ensure your plan is still relevant, useful and fair.

We understand that entrepreneurs put their money and their “sweat equity” into their businesses because they believe in themselves. One can continue to believe in one’s business while recognizing the value of diversifying assets and planning for the future. In fact, you do your business, and yourself, a greater service by doing both kinds of planning and doing them sooner.

Thomas Mengel is a founding partner of MSMF, where he advises clients on matters including retirement plans, portfolio management, family wealth planning and business succession. Tom can be reached at his office at 12213 Big Bend Road, Kirkwood, MO, 62122 and by phone at 314-677-2550.

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