The current global health crisis has created unique challenges for small businesses across the nation, which seemed to hit like a tidal wave. COVID-19 has negatively impacted small business operations in an array of industries, but it has also shed light on a crucial element of running a solid business – succession planning. Succession planning is a process that ensures your small business is prepared for the future. Some may think that having a succession plan in place may be reserved for those nearing retirement age or a family-owned business, but succession planning can ensure long-term success for your business. The true value of a comprehensive succession plan has never been more apparent than right now. One of the positives we can glean from all this turmoil is that it prompts an opportunity to better plan for future unknowns.
Common goals of a robust succession plan include long-term success of the company, confirming that both employees and customers are taken care of, ensuring financial security for yourself and your family and retaining the company’s value. While each small business will have its own unique, customized roadmap, there are best practices in succession planning that apply to nearly everyone. In the wake of the current global emergency, consider these elements as you create or revisit your overall succession plan.
Transition Plan
Plotting for the potential sale of your small business has drastically shifted post-pandemic. Typically, you’d examine the financial health of your business by asking yourself if the business model was viable, stable, sustainable and profitable. But now, business owners will be forced to examine the short and long-term effects of the pandemic on the value of their business. If there is a second wave of the virus, will your business remain stable? Focus on the sustainability of your business on the other side of this crisis – is there enough cash flow to stay operational? Change in inventory requirements, cost of goods and vendor agreements, plus increased expense margins, could impact cash flow. Consider the expenses incurred by adapting to the pandemic, including new technology to support remote employees and services. It may be appropriate to reset your expectations and timeline for transitioning your business to a future buyer.
That being said, having a plan for the future along with projections can speak volumes to a future buyer as well as a lender, who may finance the deal. A cash flow lender will evaluate a three to four-year trend in revenue, expense margins, operating margins and projections. This can mean the difference in the seller achieving their goal for retirement or walking away just being able to pay off their current debt obligations for the business.
Contingency Plan
Another important component of a robust succession plan, especially in the face of the virus, is business continuity. It may not be easy, but you’ll have to ask yourself tough questions and document your strategy. What happens if you, or other key leaders, become incapacitated due to Coronavirus? You need a plan in place to offer guidance and direction to operate the business in case of their absence. How will you respond if an employee gets sick? If you create a plan to minimize on-the-fly decision making, you and your team can make smarter decisions that will be less disruptive to long-term success. Beyond simply documenting this, make sure you communicate it to leadership and other stakeholders, so they feel prepared as well.
The Time is Now
According to a 2018 survey, 58% of business owners have not created a viable strategy even though a succession plan usually yields better results for the bottom line. However, it’s never too late to begin succession planning for your small business. For those small business owners who have not implemented one, it’s typically due to a general misunderstanding of what a succession plan entails. The SCORE Association offers a comprehensive guide for small business succession planning, which can be a great place to start. While COVID-19 has created so many unknowns for small businesses, control what you can by creating or revising a plan to ensure your business survives for generations to come.
Special thanks to Live Oak Bank, one of the nation’s premier SBA 7(a) lenders, for providing this article. For more about Live Oak Bank’s SBA lending opportunities, contact Paul Moreno at paul.moreno@liveoak.bank.
Scot Cockroft is the Owner & President of the #1 ranked Business Brokerage, Business sales and M&A firm in Texas. Scot has been named Named Deal Maker of the Year by Dallas Business Journal.
He is committed to a “different” type of business brokerage firm, one that is NOT about a sales pitch but, rather, results! In short, a business brokerage firm that is committed to performance-based compensation. Scot believes in these principles as well as a candid honesty with clients. His candid style often takes buyers and sellers by surprise, but is often what assures successful connections between the two.
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