Why Businesses Should Consider Succession Planning
A person who builds their business over the years generally doesn’t want to consider the fate of the operation after they retire or can no longer direct it. It can be an emotional decision that signifies a transition they may not be looking forward to, and it might involve the end of family management.
Moreover, the process of building a succession plan doesn’t usually translate into more sales, revenue or profit. Succession planning is like going to the dentist: You don’t look forward to it, but you need to do it periodically.
Many small and medium-sized companies procrastinate relative to this necessary process, says Roger Sciascia, partner-in-charge of tax here at Whittlesey. That kind of delay, he says, can spell disaster for the business. Here are a few key reasons why businesses need a succession plan:
1. The transition can be messy without proper planning
Sciascia says a business needs an expert and independent third party that is a trusted advisor to ask the tough questions. What are the owner's overall objectives relative to their businesses continuance? What does the owner want to see happen with the business after they’re gone? “Often, people tell us they are afraid someone will come in and not be able to run the business the way they did,” Sciascia says. “Or maybe they avoid addressing succession because it means the end of their careers.”
2. A business must have governance documents that are up-to-date
Shareholder or ownership agreements, among other things, determine how people exit and who takes their place. The contents of these agreements can directly affect the continuance and success of the business. “We usually like to address the governance documents as a starting point,” says Sciascia, “We often find they are not well-done, or not current."
3. A business can’t thrive without a strong management team
Whittlesey helps business leaders assess the management team and determine whether it is equipped to succeed in the future. In one instance, Whittlesey worked with a family-owned company whose patriarch was nearing retirement. Through interviews with the children and knowledge of the company and industry, Whittlesey determined that the business would be best served by allowing the children to focus on different aspects of the business that were their personal areas of strength. “We had individual discussions with the owner and the children and exposed some difficult areas, which we were able to resolve effectively,” Sciascia says. Those areas could have caused disaster without proper proactive planning.
4. Succession can be unexpected
Governance documents and succession plans must be updated periodically so they reflect new realities, and cover the operation in cases of emergencies. We don’t like to think about it, but an unexpected loss, illness or disability can change business operations suddenly. Your documents need to account for those scenarios.
5. There are several succession options that need to be explored
A single owner with children working in the business may simply want to pass on the business. Or, they might want to divide the owner’s duties among a group of selected managers. Another option is to sell the business. Without a proactive succession plan in place, the business may have to be sold from a position of weakness.
Selling from weakness presents problems beyond the sale price, says Joe Brennan, president and CEO of the Connecticut Business and Industry Association. Connecticut’s current business environment of complex regulations and budget uncertainties is leading buyers to consider moving companies they buy out of state. “It’s pretty attractive to a company owner to relocate if he can,” he says. It can be a difficult decision for business owners with longstanding roots in Connecticut to sell their company to a buyer who might move it out of state.
The process of succession can take anywhere from a month to a year, says Sciascia, and it’s critical to the successful transition of any business.
To find out what Whittlesey can do for your business, contact us.
A previous version of this story was first published by the Hartford Courant.
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