Succession Planning Essential for Any Business
Every business owner knows that, eventually, they’ll have to take a step back from running their company. Whether that means selling, training a replacement or staying on in a consultant role, business owners need to be prepared for that day. Having a succession plan in place is necessary for any business, no matter the industry or age of the owner. In some cases, the owner may not even be looking to retire; they may just be looking for a new professional career.
“I find that the most common reason for succession planning is that a business owner is tired, burnt out and ready to move on to something else,” said Jessica Starks, president and CEO of Transworld Business Advisors of Lansing. “Once that happens, sometimes you start to see revenue in the business decline, which means overall profitability is declining, too. So, the sooner owners start planning their exit, the better. That way, they can continue to grow or maintain the business they’ve worked so hard for.”
According to a 2015 survey conducted by CNBC and the Financial Planning Association, 78 percent of small-business owners reported wanting to sell to fund their retirements. However, less than 30 percent of them reported having a proper succession plan.
Statistics surrounding family-business success throughout future generations of families, according to The Family Firm Institute, are slightly surprising: roughly 40 percent of family businesses survive into the second generation; after that, an estimated 12 percent make it to the third generation; only 3 percent live on to the fourth generation or beyond. Much of this
failure can be attributed to a lack of proper, future planning.
Staying Within the Family
When choosing a family member as a successor, putting the business first is a must. Regardless of expectations or hopes, choosing someone who will excel and has a real passion for the business is important. Family members often have knowledge that an outsider wouldn’t and are typically familiar with processes and culture. However, you don’t want your chosen future leader to feel as though they must take over — it should be a choice, not a duty.
“When you’re gifting or giving a business to a family member, sometimes it’s not the gift that you think it is,” said Starks. “Instead, sometimes, it’s a liability or an obligation. There are plenty of second-generation business owners who are burnt out and only doing this for their family, not themselves.”
When transitioning the business internally, it’s helpful to work with an attorney to put certain contingencies in place. A buy-sell agreement, for example, protects a business should any unforeseen circumstances arise; if an owner suddenly passes away, retires, falls ill or goes through a divorce, the agreement acts as a “premarital agreement,” which sets the terms and price for an official buyout, thereby protecting everyone’s best interests.
Looking for an Outside Party
If there isn’t a family member that’s interested, you may want to consider an employee. While loyalty might be a question, if there’s someone on your staff that has been with you for a long time, there may be an opportunity to keep the business with someone you know. You could also consider retaining family ownership while allowing that employee to run the business.
If there’s no family member or employee interested in taking over, then selling might be a good option. “If you don’t have a person that’s interested in taking over, then marketing the business is always a possibility,” said Starks.
“However, the key to selling the business is making sure everyone feels safe. You want to make sure you market it confidentially. You don’t want the public to know, because then revenue could suffer, which could spook your vendors and employees,” said Starks. “In order to make everyone feel secure in the business decisions you’re making, keep those conversations private.”
Succession Isn’t Always Assumed
Succession planning may be in the cards for most businesses, but evolution isn’t a one-size-fits-all concept. In many instances, specifically in terms of family businesses, succession either happens or it doesn’t. It can boil down to the next-in-line family member lacking the desire to continue the path of those before them or opting to forge their own path.
The Lansing-based organization, Granger Construction, is a prime example of the strength of succession, but changes in leadership weren’t the result of a master plan. In fact, their current President and CEO Glenn Granger is a third-generation member, but succession isn’t something they consciously sought or devised over time, nor is it moving forward.
Glenn is the successor of his father, Alton Granger, who now serves as a chairman. Glenn’s father, uncles and grandfather originally formed Granger in 1959 and in 1991 the organization was divided into two organizations, which we now know as Granger Construction and Granger Waste Management. Alton became the key shareholder, but Glenn was soon to follow, becoming a shareholder and member of leadership in 1998.
“It’s been a somewhat steady transition. I was appointed president in the year 2000; the transition of responsibilities and growing into the role allowed me to gradually take charge,” said Glenn. “My dad has reduced some of his responsibilities in the past few years and acts more so as a true chairman now.”
The organization is proud to be family-owned, and its overarching decisions are retained by its members. The Grangers understand that exterior influences and perspectives are important when maintaining a healthy business, thus an advisory board is in place to provide insight while a governing body of select family and key personnel will strategize, discuss development and give the final say.
“For our benefit, [being a family-owned business] allows us to have cleaner decision-making processes. Our governance is such that we can do some quick decision-making, and our process allows us to manage our business in a way that is a lot simpler,” said Glenn. “We have a board of advisors that’s there to help give us some outside ideas on different things in the works and infuse fresh ideas. Decisions still come to our family board, but the advisory board gives us some great advice.”
Frankly, Granger doesn’t foresee another generational transition any time soon and aren’t planning for it, per se. When the time comes, they may reconvene, but in the meantime their current methods for organizing leadership and optioning those outside of the family to voice their opinions and concerns has proved favorable as the company continues to see growth.
So far, 2017 has been a record year for the company in terms of volume of work produced and in terms of general sales. As the company continues to pursue new frontiers, such as those beyond the Greater Lansing region, they currently aren’t hindered by the thought of succession.
“We haven’t gotten that far yet – the next generation is younger and hasn’t really shown where their interest levels might be. We’ll simply have to wait to see what is in store, but we’re comfortable with the arrangements we have for the foreseeable future,” said Glenn.
Family businesses remain unique in their position, as a change in leadership based on generation is a symbolic passing of the torch in which an informal commitment to preserving and enhancing a legacy, family values and a moral obligation supersede all other duties that come along with their new position.
While the term “succession planning” sounds very final, it’s not an all-or-nothing situation. It’s possible to create a future that successfully transfers business ownership to someone else without losing income, control or the opportunity to build on a legacy. The earlier a business owner maps out the transition process to a successor or new buyer, the more likely the succession plan will be successful for all parties, both financially and emotionally.