A Business Owner’s Hidden Asset
By Dick Yemm
Rarely have business owners been faced
with the difficult economic survival decisions required today. A
small business owner’s greatest immediate threat however is not the
economy, but suddenly being unable to participate in daily
operations. In businesses where critical decisions and leadership
rest with one person, the business’s future is quickly threatened
when that person cannot participate.
An unexpected triggering event can take
a routine but challenging lifestyle and turn it into personal and
financial chaos. The list of triggering events has no end. It can be
as rare as being fallen by a flying fish or a more frequent event
such as a slip and fall resulting in life threatening injuries.
An owner’s hidden asset is an
identified qualified successor who can assume operating
control on short notice. This is frequently overlooked when
developing a contingency-succession plan. A qualified successor can
be critical in determining whether an owner-operator will have a
business to return to should they be temporarily immobilized.
Self-employed professionals are known
for being optimistic, competitive, creative and organized. And if
they’re passionate about their venture, they work as many hours as
it takes to get results. Ideally they seek the same virtues in a
successor. Unfortunately, most successors are chosen as a matter of
convenience with little thought given to their qualifications or
In many cases, small businesses are
solely dependent on the daily participation of their owner who is
the senior manager controlling day-to-day operations. An owner who
has built a successful company does not want to surrender control
until he or she has to. Owners are reluctant to identify a successor
due to a perceived threat to their operating authority. Grooming a
successor requires time and a compromise of their decision-making.
Qualifying traits sought for a
designated successor include:
Demonstrated operating ability
Being a leader
Possessing a required level of
completed education and/or specialized degree
Having the necessary operating
The ability to advance the business
rather than just being a caretaker?
Finding a knowledgeable experienced
successor on short notice that can make essential decisions can be
key to a business’s survival. The availability of a chosen successor
is difficult to ascertain unless they are already active in the
business. For those not already working in the company, the luxury
of time to learn and make mistakes while on the job becomes
substantially reduced especially during severe economic times.
Who becomes the new senior operating
manager can determine the business’s survival. In small companies
the responsibility for operating a company frequently falls by
default to an immediate family member. The majority of the time it
is the spouse, followed by children, then extended family members.
Who are your potential successors and
how will they become the chosen successor? The list begins with:
Power struggles within families or the
business can develop immediately for many unforeseen reasons.
Frequently overlooked when designing a plan are family member
perceived entitlements. In a family business, an entitlement
mentality often leads to a self-destructing family conflict when
competing desires have not been previously addressed.
The extent of an owner’s participation
in the company’s daily operation determines the immediate and
long-term impact of their sudden departure. Different triggering
events determine the type of plan implementation.
Protecting the survival of any business
is complex at best. Key to protecting a company’s longevity is
having an effective contingency-succession plan. Contingency plans
are short-term immediate action plans that depending on
circumstances may evolve into a longer-term permanent succession
plan. A contingency plan provides an immediate transfer of
management authority while a succession plan provides a transfer of
an owner’s controlling interest and with it management appointment
The difficulty with the “I’m OK and
everything is running fine” owner/operator perception as a reason
for postponing the creation of a succession plan is that a
triggering event can occur suddenly, leaving an owner unable to
participate in determining the company’s future. The inability to
participate will set into motion a chain of steps established by an
owner’s prior action plan or, if no plan exists, then steps
prescribed by state statute.
Necessary segments that ensure a
company’s continuous operation are:
Provision for the business’s continuous operation
Identifying successor management
Comprehensive estate planning
Durable power of attorney
Replacing an owner’s (key person’s) value
Frequently overlooked when planning are
spousal elective share entitlements. The term, depending on state,
describes a proportion (typically 1/3 to 1/2) established by state
statue of an
estate which the surviving spouse of the deceased may claim in
place of what they were left in the decedent's will. A well known
example according to news accounts is when Joe Roby’s widow
exercised this option. Her award together with estate tax claims led
to the sale of the Miami Dophin holdings by Joe’s estate.
The cost to create a pro-active
contingency-succession that includes an operating plan providing
basic information and guidelines is minimal compared to the cost of
battling through the court system as prescribed by state statue or
ultimately seeing your business closed.
Is your business
prepared to operate on a continuous basis without you? You need a
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