Nov. 5, 2020—In introducing his Virtual AAPEX Experience presentation, Bob Ward, president of Perpetual Business, explained a key, but often overlooked, truth in modern succession planning.
Whether selling to an outside buyer or preparing to transfer ownership to a trusted colleague, owners that are taking the time to prepare succession plans aren’t planning for the business beyond their exit, making survival of the business after a transfer of ownership unlikely down the road.
“Sadly, succession planning is not well done in our country,” he said. “A generation ago, about 65 percent of small businesses did not survive the transition from the previous owner. These days, 85 percent do not survive when the owner departs from the business.”
With that in mind, Ward broke down the basics of succession planning into manageable steps, highlighting two of many key components that can set a shop up for long-lived success.
Prep Key Documentation
As a starting point, Ward recommended owners consider central questions regarding the fate of the business should anything unexpected occur and leave the owner unable to attend to the business, documenting key decisions in a continuity plan.
“A perpetual business is one that is always able to operate successfully, independent of its current owner, regardless of the cause of the owner’s departure,” Ward said.
That written plan should include decisions as to who will manage day to day business decision making, who will oversee payroll, who (other than a spouse) will act as the officer of the business in managing the shop’s tax filings and who will be available as a trusted resource to offer the new manager or owner valuable advice.
“In the event something should happen to you and the absence of documentation, your bank accounts may be frozen and the new manager may not be able to work with the IRS,” said Ward. “A continuity plan that identifies who will be filling these roles, at least for the time being, means the business doesn’t have to come to a complete halt, should anything happen and the shop’s staff has access to the systems that would keep everything running.”
Prioritize Retention
Ward also stressed the importance of putting measures in place to strengthen employee retention through a potentially—especially through an unexpected ownership transition—advising that without steps in place to ensure consistency and organization “your employees will start looking for other jobs and the business won’t last long.”
Ward recommended that owners put a “stay bonus” structure in place, which could be funded either by shop cash flow or through liquidity provided by a life insurance policy, to make sure staff are paid the same salary they’re currently earning without disruption for at least a year.
“In a tragedy, everything is upended. It’s chaotic,” said Ward. “Even when you've got written plans in place, people are anxious, they're stressed and there may be grief. … However if the business can keep its people, payroll gets done, key systems are still being utilized—that can put staff at ease and allow for the next owner (or a spouse or child) to make rational decisions for the future of the business.”