Estate planning is an important project for every American (and for foreigners who want to invest in America). But it’s especially important for small-business owners. The typical small-business owner’s entire income depends on his or her business succeeding. If something happens to the owner, the business could fail, and the owner or his or her family could seriously suffer as a result.
Yet, despite the importance of succession planning for small business owners, a recent survey conducted by the Wilmington Trust revealed that only a minority of business owners have a plan in place.
The rest—the majority—are making a big mistake.
Survey Finds Most Small Businesses Have No Succession Plan
According to the Wilmington Trust survey, fully 58% of American small-business owners lack a succession plan for their business. Owners older than 65 do a bit better, with only 47% lacking a specific plan. Still, we could do a lot better than half!
Of the business owners who lack a plan, more than ¾ say that their main reason for not planning is that “they enjoy running their company.” Unfortunately, they can’t enjoy running it forever. Eventually, the time will come to pass the torch or shut the business down, whether by choice or not. The only real question is whether that transition will be orderly or chaotic.
Why Business Owners Plan—And Why More Should
The survey asked business owners about their transition goals. The owners listed the following as their top concerns:
- The long-term viability of the company;
- The well-being of employees; and
- Taking care of customers.
All three of these require a well-thought-out succession plan.
A crisis in business leadership, however short-lived, can have a lasting impact on the success of a small business. If you can’t hand the reins over to someone you trust to run the business and keep it going long-term, then your business likely won’t survive long after you’re gone. If you want your business to continue, you need to plan early for that transition period.
But even if you plan to sell your business in the future (or plan for your loved ones to sell it after you die), you need it to be something that a buyer will be interested in purchasing. If business suffers following your death or disability, the value of your business to purchasers may fall, reducing what you or your loved ones can receive in a sale.
At your small business, you might be used to running everything from sales and marketing to payroll and accounting. If so, then your absence could cause hardship to your employees. And, of course, if your business experiences a rough patch when you leave, then it may run into temporary (or not-so-temporary) cash-flow problems, making payroll harder to keep up with—or even requiring layoffs.
A disorderly transition in leadership can have a negative impact on your customers, too. First, if your disability or death disrupts your business operations, then customers are likely going to be disappointed with your products or services.
But even if the transition is smooth, a sudden, unexpected change in ownership or leadership can cause your customers to look to your competitors for a sense of stability. This need for stability is one reason that many contracts for the sale of a going business require the prior owner to stay on in a limited capacity for some time after the sale is completed.
Every small-business owner needs a succession plan. If you don’t have one yet, it’s never too late to create one.
But even if you are among the 42% of business owners who currently have a succession plan, you should still review that plan with your professional advisers once every two or three years or after major life (or business) events. You never know what’s changed in the meantime!
For help creating a succession plan for your business, contact the Law Office of Bridget Mackay in Petaluma, California, to schedule a consultation.