4 succession-planning tips for small businesses

Anna Robaton | Special to

Many small-business owners know all too well what it is like to take risks, work long hours and juggle multiple priorities. Even many successful ones drag their feet when it comes to succession planning, but there are steps they can take to cut down on succession headaches.

It's not hard to understand why. Succession planning can be complex, expensive, time-consuming and emotionally wrenching. But business owners who don't have a succession plan are putting a lot at risk if they hope to someday cash out at a fair price and/or ensure that their companies survive them.

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"For most of us that have successful small businesses, the business pretty much dominates our own balance sheets," said Martin Kurtz, founder and CEO of The Planning Center. "It is our biggest asset, so we had better plan," he added, for an eventual transition in ownership or unexpected events like the ultimately death of an owner or a sudden disability.

"The best plan to have is the one you have in place, even though there are a million ways it could work," said Kurtz in a 2014 interview.

One of the biggest traps to avoid is waiting too long.
Rick Kahler, a certified financial planner and president of Kahler Financial Group

Indeed, succession planning isn't a cookie-cutter process. The amount of time it takes is often dictated by the size of a business and the particular issues involved, as well as the approach of the advisor or other professional overseeing the process. Yet advisors say successful planning hinges on some of the following considerations:

1. Don't wait too long to begin

It can take as long as a year to put together a succession plan, and plans are often implemented over the course of many years. Succession planning can involve wrestling with emotionally difficult issues, such as deciding whether a relative or longtime employee is most qualified to eventually take over. Some business owners go through several potential successors before finding the right one, advisors say.

Owners who hope to someday retire ought to start the succession planning process as early as 10 years before their anticipated retirement date, which gives them enough time to train a potential successor, gradually hand over the reins or find the right buyer, said Rick Kahler of Rapid City, South Dakota, a certified financial planner and president of Kahler Financial Group, in a 2014 interview.

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When it comes to succession planning, "one of the biggest traps to avoid is waiting too long" to begin the process, Kahler said.

2. Shop around for the right advisor, help

The U.S. Small Business administration offers some useful information and online tools. But given the complex nature of succession planning, many owners rely on advisors, lawyers and/or accountants to steer them through the process and help them to make objective decisions.

Advisors may collaborate with other types of professionals, including lawyers, accountants and those who specialize in valuing businesses. Valuations prepared by objective third parties tend to be viewed more favorably by potential buyers, including internal successors, than those calculated by business owners themselves.

"There are estate-planning issues, tax-related concerns and money-management considerations involved in succession planning," said Martin Durbin, managing partner at accounting firm Crawford, Carter, Thompson & Durbin and financial advisor at Aperture Retirement Designs. "Nobody is an expert at all of those things."

"There is no set checklist or flowchart involved in succession planning," he added. "A lot depends on the person involved, what kind of shape their records are in and what they have in mind.

"For an advisor involved in succession planning, it takes a lot of deep thought and coordination with other experts," said Durbin.

3. Evaluate your own retirement savings and insurance.

As part of the succession planning process, business owners may want to consider whether they have sufficient retirement savings and life and disability insurance. Some owners opt to buy a "key" person insurance policy, which generally compensates a business for financial losses arising from the death or extended incapacity of a critical member of the company. Payouts from such policies can be used to buy out heirs who aren't designated successors.

But advisors caution that succession planning is not synonymous with buying insurance and other products. "Some people will try to sell you products, but buying an insurance policy is not a succession plan," said Kurtz of The Planning Center. "Using risk-reduction products can be a smart move, but it is certainly not the only consideration."

4. Openly discussing succession plans and revisit plans periodically

Succession plans can be good marketing tools when it comes to attracting and retaining clients, particularly for service-oriented businesses. Advisors say business owners ought to openly communicate their succession plans to clients, potential customers and employees.

What's more, a good succession plan should clearly delineate the individuals responsible for company management and governance and identify those in ownership positions, according to Kurtz. The players involved in all three areas are likely to change over time, as will tax laws and other important matters. Therefore, succession plans should be revisited periodically and updated when necessary.

"It is important to remember that a battle plan is obsolete as soon as the first bullet is fired," said Durbin. "You have to be able to make adjustments to your succession plan because tax laws and other regulations may change.

"You might have to make course corrections as a result of things that are out of your control," he added.