Put your business’s future in good hands
By Keshia McEntire
Hanna Cho has accomplished a lot in her life. In addition to serving at the Indiana Assembly of God Korean Church that her husband pastored for more than 30 years and raising four successful children, she is the owner and professional seamstress at Joy Alterations on East Washington Street in Indianapolis. She has owned and managed her alterations shop for the past seven years. Prior to this, she worked in alterations for more than 13 years. Now Cho is looking to retire and wants to find the right person to pass her business on to.
“My sister-in-law started and operated this business before me. I don’t have a retirement plan, and my kids and family will not take over the shop, because they all have jobs,” said Cho.
Cho’s situation is not unique. According to the U.S. Small Business Administration, many small business owners have no exit strategy for their businesses, because their time and energy is focused on business survival and future growth. Succession planning is the process of creating an exit plan for whenever a business owner is ready to step down. Though Cho does not currently have a succession plan, she says she will likely stick around for the next two years until she finds and trains the right person to take over her shop.
Two succession-planning experts offer IMBM readers their input on this important but overlooked topic.
Stacey Poynter is the U.S. Small Business Administration Indiana District Director. The Small Business Administration is a United States government agency that provides support to entrepreneurs and small businesses. Bill Petrovic is the Indianapolis SCORE Chapter Chair. SCORE is a volunteer organization that offers free business mentoring services.
IMBM: What is succession planning, and how would you describe this concept to a business owner who had never heard this term before?
Poynter: I would describe it as your written game plan in the event that you are unable to run the business. A lot of people think retirement, but it could be an unknown health situation or an accident. It’s fluid and can be added to or changed anytime. You can plan for the future, but that future can change. After you write it, you will need to update it periodically.
What types of organizations benefit from succession planning?
Poynter: I think all types of organizations benefit from succession planning, whether it’s a family-owned business, a church, a not-for-profit or a large corporation. Some of the bigger corporations already have that in place in the form of (continued) vice presidents. Smaller family-owned businesses don’t always have that. If the owner is not there for any reason, who is going to keep the lights on or pay the vendors? Part of succession planning is making sure someone else is trained for that.
Why is it important that my business has a succession plan?
Petrovic: You don’t want to run a business your whole life and in the end you just shut the door and turn off the lights. You want to be able to sell it or keep it running. To keep a business in top shape, it needs to have consistent good leadership. A lot of times a business might make a reasonable amount when it’s running, but the big payoff comes in the end for the owners when they sell. Instead of saving up during their life, they are investing everything in the business, so it’s important that the business can be sold at some point. As far as keeping it running, it’s not just about naming the next person, but really a big part of the plan is figuring out how to transfer the knowledge to whoever is taking over. If you have a person in mind, you have to figure out how that person stays sharp so that, at the right time, they can step in. A succession plan is protecting your business against having one person who is so critical that if they leave, nobody else knows anything and everything falls apart.
How do I create a succession plan?
Poynter: The first step is to get the plan down in writing. Verbal agreements don’t hold weight at the end of the day. If the owner sits down with a paper and writes it down first, when they go to seek more council, they already have it written. The next step would be to go seek mentorship. The SBA has resource partners who provide free one-on-one counseling and mentorship, such as SCORE. I would highly recommend that you seek out these free resources first for any small business needs, such as succession planning.
So I have this plan down in writing, what is the next step to implementing it successfully?
Petrovic: After you get it in writing I believe having a formal review of it once a year is very important. A succession plan generally does not happen as originally planned, so I am an advocate of constantly updating a plan; people are not as predictable as a plan may say they are. You may think this person’s going to do one thing, but that person may have other ideas. They may even leave the company. Things get written down and put on the shelf. Three years later, you take a look at the succession plan and realize the situation has changed dramatically. A succession plan is not something that should be locked in. It should be worked on every year.
Churches, not-for-profits, small family-run businesses and large firms all can benefit from having a succession plan. How might these unique types of organizations need to think about succession planning differently?
Petrovic: The simple answer is that every organization needs a succession plan. Large organizations recognize that people retire and they bring in new people all the time. They have more options. The smaller the organization the more difficult it can be, because there are not as many options.
Poynter: Small or family-run businesses sometimes don’t plan because they are too busy focusing on the day-to-day functions of the business. It is very important to plan, because you never know what will happen when you walk out the door. Poor succession planning can have extreme effects on relationships in a company, or, if it’s a family business, a family. If employers think the owner is going to retire soon, they will want to know what will happen. They want to know if they are selling the business and if they will still have a job. It can change their attitude at work. The other factor is maybe the employee thinks they have a shot at buying or taking over the business, and they want to be considered for that. Those are discussions that should be taking place.
Do you think companies should hire experts to help them write a succession plan?
Petrovic: My personal opinion is it’s not so complicated that smart people who are already running a business can’t figure out. Succession plans aren’t legal promises. I would be surprised if anyone tried to take someone to court because they were next in line in a succession plan and it didn’t happen. It’s not intended to work that way.
How can companies ensure smooth transitions as leadership roles change?
Poynter: Communication is everything. It’s a good idea for businesses to announce a time period of transition. The sooner, the better to give people time to be more comfortable with changes.
Petrovic: If you are considering the view from the outside of the business from customers or clients, it’s important that the future flow is made obvious rather than a secret. Your transparency is important. From the inside of the company, let the people who are the future leaders get in the limelight as they develop their skills and things move forward, so it will not be a big surprise to anyone