The US Small Business Administration’s Office of Advocacy defines small businesses as those with under 500 employees.  In aggregate these organizations make up 99.9% of all businesses and employ nearly half of all U.S. employees.[1]  Clearly, small businesses play a huge role in the American economy, but many small enterprises have a unique challenge that large businesses do not – the need for succession planning.

Succession planning for an owner typically revolves around the idea of how to capitalize on the business so they may retire, but equally important to having a strategy is to mitigate the headaches and provide a clear path for the organization in the event something happens to the owner.  The best succession plans benefit the owner’s family, the successor, and the business itself – not just the business owner.  It is never too early to begin formulating a plan that will likely involve one of the following five situations.

  1. Sell the Business to a Co-owner or a Key Employee

Agreeing to sell the business to a co-owner or key employee is typically the first path explored because the potential buyer is already committed to its success and knows the business.  Many times, this strategy is carried out in tandem with insurance policies like key-man insurance so if an owner is unexpectedly able to perform the job anymore the family can receive their fair share of the business with minimal disruption during what can be trying times.

  1. Pass the Business on to an Heir

Transitioning operations to an heir is in most cases the ideal situation for family-owned businesses but, as all things family, emotions can run high. Determining the most capable heir is not always clear-cut and, if there are multiple candidates, tact must be used as well as planning for any contingencies that might arise due to disagreements.  Failure to plan properly in these instances are common:  it is estimated that only 13% of family owned business make it too the third generation.[2]

  1. Selling the Business to a 3rdParty

Selling to an outside entity is a common path when there exists no obvious heir or suitable internal candidate.  This option often takes the most time because any possible acquirers will require extensive documentation and will not be sentimental to the company’s history or even its employees – it will 100% be a business transaction that might entail the company’s rebranding, especially if the company’s image is tied into that of the owner/family, or the laying off of long-time employees post acquisition.

 

 

 

[1]https://www.sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf

[2]https://www.accountancydaily.co/family-owned-businesses-suffer-trust-fund-syndrome

Author: Kyle Gowen

Kyle has worked in the investments industry for over ten years, previously at Raymond James Financial Services and Duncan-Williams, Inc., and served in both client services and investment research roles.
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