There are millions of small businesses in the United States, and many of them have something in common, and that is that they do not have a succession plan.
I have heard figures like 80% or higher do not have a succession plan. Over 50% of the companies that have a succession plan, have either outdated plans, or incomplete plans.
Why is this an over whelming problem with small business owners? Why would a business owner not want to make sure their “lifetime of effort” isn’t lost because of a lack of planning?
SCENARIO: Someday all business owners will leave their business, either by retirement, death, disability, or just drop dead at their desks.
There will be a great loss in the value of the company because of this lack of planning, and consequently, the owner or the family will not receive the true potential value of the business.
While I cannot explain why business owners do not do their planning, I can tell you some of the reasons the business owners and their family will not get the true value of their company when one of the three triggers occurs (retirement, death, and disability) They would be:
Lack of planning -. They do not implement systems such as value drivers’ systems, next middle management, systematizing procedures, and others business building procedures. These are the elements that create the future value which a purchaser looks for when buying a business.
The lack of planning also includes the failure to develop a middle management which could take over most of the tasks of the owner. By not creating a middle management, it leaves the owner as the indispensable person, the essential person in the firm. This is a dangerous position for the future of the company. It may be the greatest threat to the future value of the business. Like anything else, when you lose the essential indispensable part of a machine, the machine will not work. This is the same for the company when the owner is the “essential and indispensable” employee.
Time- Most systems need time to develop and cultivate when building a business. Processes and systems need years to mature and create the potential value of the company. Consequently, when the owner gets near retirement with no more road left to plan, it is too late. Selling the business at the most potential value is not attainable.
No liquidity: Many business owners put too much of their wealth in the business, such as inventory, machinery, receivables, and benefits, to name a few. They do not make the adjustment to using business cash flow to create wealth outside of the business, like pension plans, executive compensation plans, and other value building programs. Consequently, when capital is needed, it is hard to raise it, and is not readily available to the owner when needed the most.
When business owners, decide they want to retire, and leave their business, they find themselves in a conflicted position. Because they did not take the time to plan, they have run out of time, and they will not yield the value they would have normally received if they had done planning over the years.
The only options they may have:
- Sell at a reduced price
- Stay in the business until they find a buyer willing to buy at this price
- Continue in the business to fund their “retirement years”
The bottom line is to start your planning early. My suggestion would be on the day you buy or start your business, start implementing a transition plan, as most of the transition planning requires an extended period in order to implement.
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