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 availability.

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:

  • Loyalty

  • Company knowledge

  • Demonstrated operating ability

  • Being a leader

  • Innovative

  • Possessing a required level of completed education and/or specialized degree

  • Having the necessary operating licenses

  • 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:

  • Your spouse

  • A child or children

  • A loyal employee

  • Trustees of a trust

  • Someone outside of the business

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 authority.

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:

  • An operating plan

  • Provision for the business’s continuous operation

  • Identifying successor management

  • Comprehensive estate planning

  • Durable power of attorney

  • Will

  • Insurance

  • 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 plan!

Read other articles and learn more about Dick Yemm.

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