Entrepreneurs not prepared for succession

Many entrepreneurs spend their entire lives developing and growing their businesses, often putting all their time and money into making them a success.

Unfortunately, many small business owners in Canada don't have a plan for the succession of their businesses even though they know the value of having one.

A recent report for the Bank of Montreal has found that more than half of businesses polled are in the later stages of development yet only 21 per cent of the owners have named a successor.

Forty per cent of owners don't have a succession plan because they believe it is too early in the business's development to have one. However, more recent owners see the value in having a formal plan in place earlier in the business cycle.

The reason many owners procrastinate in getting a succession plan is because they don't know how.

"Whether they intend to sell their business or hand it down to a family member, it's important they begin planning as early as possible to ensure they get the most out of the many years of work they have put into the business," says Sean Foran, co-author of a book on succession planning, Succession Stories from the Front Line.

A good place to start is to focus on the business and decide what it needs to evolve. You can then determine the financial and human capital the business needs to move forward in the future.

A study of estate transitions in the United States has found that 70 per cent of transitions fail and only 30 per cent succeed. Sixty per cent of the failures are caused by a breakdown of trust and communication within the family, 25 per cent by not preparing the heirs properly for the responsibility they will inherit, and the rest fail from tax, legal, accounting and other issues.

Almost forty per cent of the businesses in the BMO survey said their ideal succession plan would involve selling their business to an outside party. Only 17 per cent said they would sell the business to a family member, 25 per cent said they had no family members interested in taking over the business, and 17 per cent had no family members qualified to take it over.

Foran says there is a new trend developing in business transitioning called the unintended seller.

"The unintended seller is a business owner who had no intention of selling but receives an offer from a venture capital or private equity company wanting to buy the business," says Foran. "There's a lot of money out there looking for small companies with potential."

Because business transition planning can be a complicated and emotional experience, it's often advisable to seek the help of professionals.

Many leading financial institutions have professionals on staff to help owners through the process.

"The best thing I could say to someone starting the transition process is to get advice, be objective and use the experience of others who have done it," says Foran.

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. (boggsyourmoneyrogers.com)

Copyright 2008 Talbot Boggs