Why Succession Planning is Important

In my family, only my great-grandfather had the experience of starting a store from the ground up. 

While none of the first two generations are alive to talk about it with me, I believe my great-grandfather was like most business owners. When he first opened, the thought of retiring or selling the business was not on his mind. We jokingly say that my great-grandfather had the best retirement plan: he had five children. Surely one of them would want to succeed him in the family store.

That is exactly what happened. Three of his five children went into business. One opened his own store 20 blocks away, while the other two succeeded my great-grandfather. Eventually, my grandfather bought out the brother who had joined him in this succession.

Somehow that managed to work, and the family business continued.

This is where I must insert the disclaimer: Do not try this with your own business.

Compared with my great-grandfather’s general lack of vision for succession, which happened to work, there should be a more-concrete game plan for your future. When you start a business, think of it like the experience of opening a door and entering a room. You should also know how you are going to walk out of that room, closing the door on that experience of your life.

Leaving your business, you have several options. These include: close it down, sell it to an outsider, sell it to employees, or transition the business to a family member. You do not need to make this choice today, of course, but you do need to start thinking about how you will get out of the business, regardless of when it will be.

For example, keep this in mind. One of the benefits of owning a business is the expenses and deductions you have as an owner that average individuals do not. Examples include your business providing you a cell phone, automobile, insurance (life and health) and even letting you hire your children, as compared to giving them an allowance. You can pay for these perks with pre-tax dollars, while also diminishing the tax liability of your business. In the end, you wind up with more dollars in your pocket. Your business does not look as profitable, but since it is your business, it matters only to you.

Keeping all that in mind, when you decide you want to leave, the day of transition must be planned out for several years ahead. This is for time to clear up — and take out of the business — all those expenses I just described. For the sale, the buyer will base their offer on the profitability of the business. Hence you want your business to be as profitable as possible. 

Transiting to a family member is a bit more complicated. Especially if that family member has been a part of the business. The challenge is that you are selling to a person who has helped build the business. Their work has helped you grow its value, but at the same time, these efforts work against them. I will offer a suggestion, which is what my parents used for me.

They looked at the value of the business on the day I joined, and then again on the day they left. Half of the increase in value over those years they credited to me as a “down payment” for the purchase of the business. It was fair to them, to me and to my siblings.

In this column I covered just a few quick glimpses of what you need to think about. But you definitely cannot wake up one morning and hang a “for sale” sign. You have got some planning to do.

Tom Shay is a lifelong small-business owner and manager. He has authored 12 books on small business management; a college textbook on small business financial management and co-authored a book on retailer/vendor relations. Tom has written over 400 articles that have appeared in over 70 international trade magazines.


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