Let’s start with a thought experiment. Imagine you have a time machine. But to thwart the type of catastrophes populating so much science fiction, your device only allows you to do one thing: check on your business in the future. Do you have confidence it will be thriving in 50 years? 100? If you don’t, or you haven’t even considered it, it’s time to focus on business succession planning.
As it turns out, many small and medium business owners haven’t thought much about creating a succession plan. They’re too busy running operations on a day-to-day basis. Likewise, they’re concentrating on items like business development instead of succession. But succession planning for this business segment is particularly important, especially as PwC’s Family Business Survey forecasts strong growth, with 86% of family businesses expecting positive numbers over the next two years.
Why Business Succession Planning Matters
At the same time leaders are focusing on strategies for successful growth over the next 5-10 years, they should also consider their legacy. Succession planning for small businesses isn’t as simple as handing the company down to the next generation. Why? For the simple reason that many companies utterly fail to make this happen. According to the SC Johnson College of Business at Cornell University, only 40% of family-owned businesses in the U.S. manage to transition to a second generation, with only 13% making it to the third, and a miniscule 3% proceeding to the fourth or beyond.
Cognizant of the trends, Inc. Magazine documented the experiences of small and medium business owners with succession planning, revealing the good, the bad, and the ugly. Witnessing all three categories firsthand in our client work at Sofer® Advisors, it’s key to know how your succession plan (or lack thereof) will impact your business and your legacy.
What Lacking a Business Succession Plan Can Do to Your Company
The above Inc. article describes a family-owned business running a popular Delaware dinner theater founded just after World War II. Though multiple family generations worked for the business, including in senior leadership roles, the two brothers who founded the organization kept 100% control—even into old age. Unfortunately, they made poor decisions due to their distance from operations, eventually forcing them to sell the company and lay off multiple family members.
A cautionary tale, it reveals how small and medium businesses lacking a succession plan are doomed to be lost to history. Either they will be sold to a larger corporation, losing the family connection that brought them to life, like the above dinner theater, or they will cease to exist, disappearing from memory. Unless, you have a time machine!
Weak Business Succession Planning is Almost as Bad
A weak succession plan sets up both your business and future generations for failure. There are many ways succession planning can go wrong. Sofer® Advisors often finds family members disagree about their business’ value. This can play a crucial role in proper succession planning. In some cases, as Inc. explains, family members just aren’t interested in running the business. But planning—or really, not planning—for a future where children or other relatives suddenly change their mind about carrying on your legacy is not a wise decision.
Over the years, some famous businesses have faltered due to their own weak succession planning. A family business that started with a single chocolate shop in 1824, Cadbury grew to become one of the most popular UK brands. Their success lasted all the way to the 1960s, when a merger with Schweppes led to decades of the Cadbury family losing control of the company, resulting in an eventual sale to Kraft in 2010.
A Strong Business Succession Plan Creates Opportunity
When succession planning for small and medium business is done right, a company can thrive for years, creating generational opportunities and cementing the founders’ legacy as savvy leaders with an eye to the future. One surprising example of this is Ringling Bros. and Barnum & Bailey circus. Turns out the company’s owner was far shrewder than the average ringmaster.
Irving Feld bought the business in 1967, quickly expanding it beyond circuses to events like Disney on Ice. Feld eventually developed a succession plan featuring his three daughters to one day take over the company from him. But before joining the family business, Feld made his daughters gain outside experience. He also hired a President & COO whom his daughters could report to as they expanded their leadership skillsets. Feld explained, “It’s conceivable that the business will continue to thrive another 60 years, most of that without me. I would rather have my daughters get their feet wet now when I’m around to offer advice and ask the tough questions.”
How Sofer® Advisors Helps with Succession Planning
Based on stories like these, the business valuation experts at Sofer® Advisors set the table for succession planning with accurate and defensible business valuations getting all stakeholders and family members onto the same page. From there, a roadmap can be created signaling the business’ direction, and how to get there.
Thoughtful succession planning plays a major role in this determination. Moreover, the right roadmap enables business owners to better understand what’s best for their business past their own retirement. One of the critical decisions an owner must make is who will take the reins once they leave day-to-day operations. Naturally, a clearheaded evaluation of candidates is an important step. And even if a succession candidate has much work to do to prepare, that, too can be part of the business roadmap.
Returning to Irving Feld of Ringling Bros., he explained the secret to all this is to develop the skills to run a business before the next generation must take over, not after. This process instills confidence in the future leader—while also easing concerns about the business’ future. If performed correctly and mindfully, the organization won’t miss a beat when the handover finally occurs.
At the end of the day, Sofer® Advisors is ready to help you create your own viable business succession plan. If you are ready to put a solid roadmap in place to protect the future of your business and your legacy at the same time, please contact us today for your free consultation.
David Hern is the founder and chief executive officer of Sofer® Advisors, LLC focusing on business advisory services related to litigation assistance, estate and tax planning, and business enterprise valuations for various privately-held and public companies. He is a qualified financial analyst with a proven ability to simply and clearly communicate analysis to boards of directors, presidents and CEOs, CFOs, controllers and private equity portfolio managers. David has been recognized for enabling organizations to determine their enterprise and equity value for a variety of situations including strategic planning, sale or IPO, mergers and acquisitions, financial reporting (common stock, stock options grants, purchase price allocations, impairment analyses, etc.) and tax compliance (estate & gift, 409A, NUBIG). Industry experience includes, but is not limited to, professional services, business service, healthcare, information technology, financial services, and manufacturing & distribution.
