Small business owners may not think they need a succession plan, but that assumption is one of many mistakes they make when it comes to planning their future and the future of the business.
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There’s no question some tiny operations may not require any plan at all, but if you see the business changing in the future or want it to outlive yourself, than it’s a necessity.
“A succession plan lets a founder think about moving beyond the day-to-day, adapt the business as it grows and prepare for a potential exit,” says Hunter Hoffmann, head of US communications at Hiscox, a small business insurance provider. “If you can’t develop a plan you believe in, the business is too dependent on you and that’s a big risk.”
Many small business owners think of a succession plan as designating its next leader, but it should be about surrounding the company with a reliable talent pool, coming up with a backup plan for if the owner is hurt, incapacitated or suddenly dies and ensuring if family members are going to take over the helm they’ve gained the job on merit, and not because of nepotism.
“It’s incumbent on any business person to make sure he or she has an inflow of people and training and mentoring programs,” says Robert Gellman, managing director at small business consulting company CBIZ MHM. “They have to do their best at making sure they’ve got the next generation of people there.”
According to experts, one of the biggest mistakes small business owners make is doing nothing at all. Experts say it often happens because the business owner is too busy to think about what ifs. But when those what ifs happen, employees are left scrambling.
That’s why experts say small business owners have to think about the little things as well when it comes to succession planning. If something happens to the owner, who takes over control and who has the authority to sign the checks?
“I find a lot of small business owners, especially ones who are looking to their children or a key employee to take over the business don’t plan for it, don’t train for it and don’t even ask (if the person is interested),” says Janice Cackowski, a wealth advisor at Strategic Wealth Partners. “You want to keep employees apprised of the plan and let them know there is something in place if the boss gets hit by a bus.”
Another common misstep when it comes to succession planning is thinking the business can simply be turned over to family members and continue like nothing happened. That works out fine if the business is growing and there’s enough cash flow to support the new leader or leaders, but if money is tight it’s questionable as to how the business will succeed.
“If the cash flow today goes to support the founder then how in the world is it going to fund the compensation for the next generation of owners who wants the same things,” says Gellman. “People need to be realistic about cash flow.”
If your son or daughter is next in line to take over the business, experts say it’s a good idea to let them go out on their own for a while and gain the experience before taking over the reins. That will ensure people respect the new owner or owners based on their own merit, not because they are the founder’s kids.
Whether family or not, deciding early on who will take over can make all the difference in the lifetime of your business.
“Having the wrong person in charge can quickly chip away at your existing company culture and take down the whole enterprise,” says Hoffmann. “Think about people’s personalities as well as their skill sets when you’re planning for the best chance at success.”