The sole proprietorship has many benefits in addition to being the easiest legal form of business to start. However, unlike partnerships, LLCs, and corporations; a sole proprietorship might cease to exist if something suddenly and unexpectedly happens to the owner. If the owner's family members are not active in the business and the business is a key component of family wealth, the owner should plan ahead to ensure the continuity of the business or closure in a suitable manner. Passing the business through an orderly succession to family members, employees, or a competitor is the ultimate management challenge. Whether it includes retirement or the unexpected, a succession plan is the single greatest tool for ensuring that the owner's family and employees are protected.
There are many reasons business owners neglect this important planning. Some don't want to think about their own mortality or they plan to work for many years. Others are afraid of creating family divisions by choosing one child over another as their successor. Most are too busy working to be bothered with planning of any kind.
In family-run businesses and businesses with employees, a planned transition to groom an intended successor can reap benefits and forestall problems. Sometimes the successor is not up to the task, thus allowing time for reevaluation. The plan can also consider external influencers such as changes in the marketplace, new technologies, pending laws and competition. A key part of the succession plan should include professional advice regarding taxes and estate planning.
Ninety percent of the 21 million US businesses are family owned. Yet only 30 percent of family run companies today succeed into the second generation, and only 15 percent survive into the third, according to SBA.gov. The reason for this significant failure is obvious; these businesses lack an orderly succession plan. If the business of succession is not done by process, it will be done by crisis with perhaps disastrous results.
It would be a wise strategy for any existing business to have a current business plan. It should include a business valuation and financial statements. The business plan can serve many purposes for the owner, but it would a great roadmap to hand to successors. The continued operation of a successful business is the greatest testament to a business owner after his or her death. Be sure your small business survives for many years with as little disruption as possible. Have the foresight to create a succession plan. Your heirs will be glad you did.
Gordon Smith is a business specialist at the Small Business Development Center at Clovis Community College.