Personal Finance

Most Small Business Owners Lack a Succession Plan

Workers sit around a table.

Many small business owners have their identities wrapped up in their companies. That makes sense because building a small business is often the fulfillment of a dream -- a very personal kind of success.

Because a small business owner often built their company from the ground up it can be hard for him or her to discuss succession. In fact, 58% of small business owners have no succession plan, according to a study of 200 privately held businesses by Wilmington Trust. Most of those with no plan (78%) blamed their lack of planning at least partially on enjoying "managing their company too much to start thinking about a future transition" while 42% said they were too busy to plan, and 44% felt that succession was "too far in the future" to need to establish a plan now.

"The reality is that planning effectively and running a business are not mutually exclusive," said Matt Panarese, president of Wilmington Trust's Mid-Atlantic region in a press release. "Owners don't need to walk away from the business they've spent their lives building to start thinking long-term. In fact, early planning can provide more flexibility and allow owners to continue to work in whatever capacity they choose -- before and after a transition."

Workers sit around a table.

Talking about succession is very important. Image source: Getty Images.

You need a plan

If you don't have a succession plan your death or inability to continue running the business could put your heirs in a tough spot. Succession planning isn't just about control and ownership. There also may be tax issues, training concerns, or finding a viable exit strategy if there's no relative or current employee willing (and able) to take over.

These aren't easy conversations. My family owns a business that has multiple locations and around 200 employees. I worked there for four years and while I have no interest or intention of running the company, it's possible that deciding what to do with it could someday fall to me as the only member of the family's third generation to have experience working there.

Unfortunately, as is the case with many small business owners, the person in my family running the company never envisions retiring. She also does not enjoy discussing her own potential demise as I learned through this conversation:

Me: So, what happens if you get hit by a bus or eaten by a shark? Who will decide what to do with the company?Family CEO: I'm not planning on dying any time soon.

That's, of course, just a rough recollection of the conversation and it's not the only time I have brought up the topic. My family is actually better off than many because ownership interests in the company after the current generation have been determined and are in trust. That's at least partial planning, albeit not enough to solve some of the inevitable problems should the current CEO -- who just turned 65 -- not prove immortal.

That puts my family slightly ahead of 47% of survey respondents age 65 or older who had no plan at all. About 3 in 10 of those with no formal plan (27%) do have a broad outline while 20% have considered it but have not started planning.

"Advance planning enables owners to continue to run the business they've built, while addressing financial security for themselves and their families," said M&T Investment Banking Group Managing Director Stuart Smith in the press release. "It can also help them obtain a better result once they decide to transition."

Just do it

Everyone dies and many people retire to enjoy the fruits of their labor. Succession is not an easy topic for a variety of reasons. It's hard to confront your own mortality and not fun to tell a family member or trusted employee that they won't be taking the reins as your replacement.

Still, it's selfish and dangerous to not address these issues. The best way to control what happens to your business -- in many cases your life's work -- is to take the proper steps to execute your plan. Even if what you want may anger your family or employees, it's always better to handle it now when it can be discussed than to leave it for lawyers after you're gone.

The $16,728 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies .

The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks

Latest Personal Finance Videos

    #TradeTalks: A Holistic Financial Picture to Give a True Indicator of your Financial Health

    Harvest Founder Nami Baral joins Jill Malandrino on Nasdaq #TradeTalks to discuss the Harvest PRO Index, holistic financial picture to give a true indicator of your financial health, not just a credit score.

    Oct 9, 2020

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More