Timely Business Succession Planning is Timely Economic Development
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Studies have shown that it is almost always less expensive to "retain and grow" existing business in a community than it is to build or attract a new business into that community. Yet, much of the economic development is focused on attracting new businesses, as many of the old businesses either "die off" or are moved to a location outside the community when they are purchased and consolidated into another enterprise. Wouldn't you and your community be better off if you could help retain more of these businesses in your own area? Of course the answer is yes. The next issue becomes how can we increase the retention of such businesses in our communities. To accomplish this, we first need to understand the dynamics of why some businesses don't continue into the future.
Statistics on small business survival are grim: less than 30% of small, closely-held/family-owned businesses make it in to the 2nd generation. Going from the 2nd to 3rd generations, the numbers get even worse (less than 15%). There are a lot of reasons as to why this is. Some businesses naturally run their course; some are negatively affected by downturns in the economy like the one we are currently in. Many others fail because the owner(s) have improperly planned (or sadly not planned at all) for what will happen when they exit the business. The irony is, proper planning for ownership succession, unlike some other factors that cause a business to fail, are generally entirely in the control of the owner(s). This is why we commonly say that lack of planning for ownership succession is the single most avoidable source of job loss in our communities. Focusing on this third cause could lead to a more efficient uses of our economic development efforts-and dollars.
So why do so many small business owners fail to plan for ownership succession, and what can the economic development community do to help? First, let's look at a few reasons planning is not done.
Generally speaking, business owners: 1) tend to be results oriented (often, the more immediate the better), 2) like being in control (not delegators), 3) are extremely focused on the day-to-day running of their business (priorities are a good excuse for doing nothing), and 4) tend to be "do'ers" not "plan'ers".
For succession planning to be truly effective, generally speaking it will require the business owner to: 1) focus on a process whose results may be years down the road, 2) eventually cede control to other people or parties, 3) take time out of the day-to-day running of the business to focus on how they plan on exiting their business, 4) think relatively deeply about issues (some, like family issues, they may not want to think about at all) related to the plan, and 5) ask for help (professional advice is available).
When you combine these fundamental issues with the complicated technical aspects (legal, financial) planning process, an all too human tendency is to avoid planning at all (or at least until forced to).
Another issue is based on the current economic situation. I've talked to many, many business owners over the last 12-18 months who, when asked if they have a plan for exiting their business, say something to the effect of "Retire? I am trying to make it past this week. I'll worry about that later! Besides, my business is worth less than it was 6 months ago." Unfortunately, this is almost always the wrong approach. Many business owners think that the time to start planning to exit their business is when times are good. The irony is, done in this fashion, by the time the owner is done with the planning process and is ready to pull the trigger (a process that can take years) the economy may have turned down again, making the transaction less desirable from the owner's point of view. A more recommended approach might be to:
Plan when times are good or bad, and pull the trigger when times are good.
A good strategy for economic development professionals in counteracting a lack of planning is to be proactive. Often times, ED professionals only hear about a business having a succession planning issue is when it is too late to do anything about it. Most ED professionals are in constant contact with the businesses in their area of responsibility; it is vitally important when making contact that a discussion regarding ownership succession occurs.
A second key "best practice" is Ed professionals need to educate themselves on the basic issues surrounding ownership succession, so as to better communicate to business owners the reasons why planning is important, strategies for getting started, and resources that can help.
The Succession Planning Program at Kent State University (an affiliate of the Ohio Employee Ownership Center) is offering a two-part, free, webinar series (sponsored by the Ohio Department of Development) on business succession planning for economic development professionals. The goals is to help ED professionals better help their area's businesses through this sometimes difficult process. More info on the program and registration details can be found at:
http://www.oeockent.org/index.php/successionplanning/resources/webinars/#econ
The Program also has many other resources and programs available for ED professionals and business owners in this area. More information is available on the website.
I'd like to thank Roy Messing and Jay Simecek, both of the The Succession Planning Program at Kent State University for contributing to this article.
