Business experts agree that a good succession plan is a key component of a larger business plan written at the company’s inception or when a new owner takes the helm. The key is not to confuse a succession plan with an estate plan or a death contingency strategy that’s needed only in an emergency.
An effective plan should result in a seamless transition, regardless of the store owner’s exit strategy. “A succession plan is the continuation of success,” says David Ciambella, a partner with The Rawls Group, which specializes in succession planning. “Developing and implementing an exit strategy can take as little as three years or up to 10 years or more. But ideally, it should be part of a company’s daily business practices.”
A succession plan goes into effect the day you hire your first staff member, or the first time you’re called “boss.” Today’s entry-level sales associate could be tomorrow’s store manager and perhaps an eventual successor. “A good business is all about people,” says Ciambella. “You need to invest in people along the way, especially those who are heads of the business.”
How profits are spent is another aspect of a successful succession plan. Many business owners make the mistake of pouring every dollar of profit back into the business, which has risks. “Depending on the nature of the business, an owner, at a minimum, should reinvest 25 percent of profits back into the business,” says Ciambella. “The more financially sound and better-capitalized business owners eventually realize the proper percentage of reinvestment back into their business.”
That appropriate balance should be a constant goal for small-business owners. Succession planning can’t be reasonably discussed if the business is not in a strong cash position, or if the store owner is significantly dependent on the store for retirement income.
“In the long term, a store owner has access to many of the same retirement options as anyone else who works for a company, namely a 401k plan, annuities, and life insurance,” says Ciambella. “In addition to building liquid net worth, many business owners invest in real estate as an alternative means of wealth accumulation and diversification.”
Succession planning requires honest discussion of money issues, legal matters, and exit strategies. Open communications about the plan may determine who will one day take over or buy the family business.
“Talk about taking over the family business with your children,” says Daniel Schneider, another partner/director in The Rawls Group. “Even if your son or daughter is interested in some day taking over the family business, they may not be able to manage it at your level, which would be detrimental to any succession plan.”
PDP (Professional DynaMetric Programs), a personnel assessments company, has developed a technical approach to determining the right successor for a family business. PDP’s ProScan software tests for behavioral cornerstones of business acumen, namely decision making, dominance, pace, conformity, energy, and leadership style. The Rawls Group is a licensed associate of ProScan.
“While the current business owner is in power they want to make sure the next generation has a similar work ethic,” says Schneider. “This survey has a 96 percentaccuracy rating and can help build a strong management team and better define the responsibilities of each family member in a generational business.”
In addition, ongoing discussions of family dynamics within the context of a business can establish weighted voting in determining the direction of the business, including how it is sold or transferred.
Mary Loose DeViney is the owner of Tuel Jewelers. In her role serving on the business and industry sub-panel of the Secure Commonwealth Commission of Virginia, she suggests some options for transferring ownership of a small business from one generation to the next for jewelry stores of various sizes.
Small to medium-size jewelers (sales of $3 million or less) should explore S corporation options. Owners of medium-size businesses (sales ranging from $2 million to $7 million) might consider a nonstock corporation agreement. Large family businesses ($7 million or more in sales) should consider either a private stock option or a nonstock corporation.
DeViney encourages family business members to bring in trusted professionals when drawing up agreements. “To make sure the agreement, no matter the type, is fair and equitable, family members should bring in a lawyer, an accountant, a financial advisor, and even professionals who work with family businesses,” she says.