Small Business Succession Planning
It has been said that small business is the growth engine of the United States Economy. During a period of economic growth and expansion, small businesses create jobs at a much faster rate than large corporations or the federal government. But during periods of economic down turn, small businesses struggle to maintain full employment for its workers. Most small business resists the temptation to lay off employees due to the fear that they may not be able to replace them if business turns quickly.
Small businesses fail for any number of reasons including, cash flow, product failure, competition, and mismanagement. One of the most avoidable reasons a small business fails is due to the lack of proper leadership succession planning by the owner or founder. This type of failure most commonly occurs in family owned small businesses or limited partnerships. When a successful small business fails because the owner or founder is no longer able to lead the enterprise, the resulting loss of jobs lands more people on the unemployment lines.
The United States unemployment rate remains at an historic 9. 1% unemployment at the end of September 2011. The economic and employment outlook is not nearly as positive as many had hoped at this stage of the recovery. Major corporations continue to squeeze labor to improve profits, and announce layoffs in advance of quarterly earnings reports. Some large companies even resort to announcing labor reductions and layoffs well into the foreseeable future. Bank of America announced the layoff of $30,000 workers over the next few years according to the Charlotte Observer, Friday September 2, 2011.
With many major American and European financial banks and institutions struggling to grow profits and satisfy investments, developing new job opportunities and employment growth is the last and least favorable business initiatives these large corporations will consider. For the large corporation, it is a matter of survival. The only way for the large public corporation to survive is to continue to provide a reasonable return to the stock holders. Cutting jobs and restricting labor cost can be a viable way for the large, publicly traded corporation to cut cost and improve profits.
In contrast, the small business survives because it returns enough profit to maintain existing business and expenses, and it continues to have a market place to grow. Unlike large corporations, the small business enterprise relies heavily on people and employees to fuel growth and perform its business function. Small business represents the best opportunity to expand employment opportunities in the United States and provide the most consistent path to move the employment rate down to the 4-5% rate the United States enjoyed before the Wall Street Financial meltdown and subsequent recession in 2008.
When the government reports the jobless numbers on Thursday each week, they make an important distinction between public job growth and private sector job growth. Large public corporations report the number of new hires, but small businesses are too busy trying to turn a profit to report weekly employment numbers to the local government. Once a small business is well established, and the ownership has the experience and wisdom to stay in business for more than twenty years, the greatest risk to the survival of the business is the failure to develop a succession plan for the inevitable death or retirement of the company founders and owners.
Without a well developed succession plan, many small businesses cease to exist. Many of the small businesses fail after the owner or founder leaves because they leave the business to an heir who does not have the proper training, experience, or passion to carry on the vision of the founder or move the small business in a new direction. Many of the successful small business fail during the first few years after the owner or founder sells the business to investors or partners who do not have the leadership or passion to carry on the vision of the business.
When new owners take of a business and they lack the same passion for the success of the business they just acquired, the business takes on a new character the customers start to notice right. Walters Tool and Die is an example of a small business that suffered significant damage and eventually failed because the owner and founder failed to develop a succession plan in the event of his retirement or death. James A Walters III started WT&D in 1978 out of his garage with the help of his wife Linda and four children. WT&D started as a tool and die supplier for the poultry manufactures and producers in the South Eastern United States.
During the 1950s and 60s, the poultry industry went through a transformation from small farm suppliers to very large produces with automated poultry processing plants. Scientist developed growth hormones which allowed producers to bring a chicken to full growth size in just nine weeks instead of the fifteen to eighteen weeks naturally. As the plants became more automated to increase production and satisfy the growing demand for fresh poultry, mechanical technology and automation allowed producers to keep pace with the faster developing live stock.
When automation fails and requires repair or replacement of mechanical parts, James Walter found a niche in machining and supplying the fastest and most technically precise parts in the industries. As the industry continued to grow, so did WT&D. Over the years, WT&D developed over nine patents on new and improve mechanical machined parts and components. By the year 2008, WT&D had grown from one employee out of a garage to over 125 employees in a 75,000 square foot facility.
James Walters was the only member of his family on the company payroll when my dad went to work as the General Manger for WT&D in 2000. My dad was hired away from Georgia Power by James Walters because of his good reputation in business and his loyalty to his friend. Soon after my dad joined WT&D, he learned that the company had a very week management structure, and that James Walters was in poor health. His three sons and one daughter decided not to work in the family business electing instead to work in large corporations in cities all over the US.
Over the next 5 years, the health of James Walters continued to decline while along with the health of WT&D. James made every effort to maintain control of the company but made very little effort to develop a plan to continue the employment of the 125 workers and families that depend on the strength of WT&D to provide for their families. In December 2000, James Walters suffered a massive heart attack resulting in complete loss of mobility, congestive heart failure, and early onset Alzheimer’s.
By March 2001 each of the four children hired teams of lawyers to decide who would take over as president of the company. While the legal battles consumed much of the time and finances of the company, the competition pounced on the expiration of 5 of the key patents that expired in the year 2000. By September 2001, WT&D started losing market share due to the competition producing the same parts at much lower prices. By the end of December 2001, WT&D would record the first sales and profit decline in over 20 years.
Sales had declined from $190 Million to less than $150 million within 1 year of the loss of the leadership of James Walters. The lawyers for the four adult children gained receivership of the assets of the company by first having the founder and owner found incompetent to control his personal or business affairs. Once the assets were seized, the creditors and financing needed to run the day to day business and fund payroll began to tighten more and more. The resulting uncertainty caused the banks to increase interest and restrict the long standing lines of credit.
In June 2002, WT&D filed for chapter 7 bankruptcy protection and closed for business. Over 100 employees with years of experience found themselves out of employment and looking for answers. The story of WT&D is not uncommon with successful small business. For successful small business to survive as long as WT&D did in the market, they need a carefully devised succession plan to make certain the company survives the loss of the founder or leader, and has the ability to continue to grow on the same direction without the founder or leader.
James Walters could have avoided the failure of his life’s work if he had identified a successor early in the history of the organization, developed a comprehensive training and development plan for the successor and provided the mentorship needed to assure the core philosophy and core value of the company was persevered and the leadership abilities of the candidate comes out. Creating a comprehensive, successful small business leadership succession plan requires concentrated effort to identify, train and develop the future leadership of the company.
Although finding the right successor is the most important step of a small business succession plan, it is important to point out that other legal and financial steps must be taken as well. A successful succession plan will always include legally binding contracts and business plans which clearly define the roles of the company leadership in the event the owner or founder is lost. Additionally the successful small business succession plan will include enough business and personal insurance to bridge cash flow needs after the loss of the owner or leader.
If the business is a limited partnership, legally binding agreements must be in place to describe how the equity of each partner will be bought out in the event of the loss of one of the partners. When James Walters recognized that none of his four children would be interested in running the family business or had the ability to run the family business he should have started looking for a successor who shared his passion for the business and had a clear willingness to learn more. In a job market were most employees will work or more than five employers before they retire, it may be most advisable that the successor be someone in the organization with the basic skills and education to take on the challenge of leading a multi-million dollar business. The best candidate should demonstrate the competence and intelligence to understand the business and business principals, and have the ability to lead and inspire those around him or her. Someone in middle management and preferably middle age should make an ideal candidate to succeed the owner and founder of a small business.
It is very important to have a clear conversation with the candidate. He or she should be told what is at stake and what is expected in the role. They should be compensated in such a way that they would not have to consider leaving the company for a competitor. The last thing a small business needs is to invest time in a successor that defects because the grass was greener on the other side. Once the candidate is identified, the training and development of the candidate should begin as soon as possible. Learning to run a successful small business is not usually taught in business school.
The training plan for the successor should start with a full knowledge of the entire business from start to finish. The successor should be placed as a department head in every department in the company and given the authority and responsibility to succeed and each component of the business. The department head responsibility should take place over a 12 to 18 month assignment. It is very important that the successor has real responsibility for the assignment. It is the responsibility of the owner of founder to impress on the successor that his success in the department assignment determines if he or she proceeds to the next assignment.
The owner can not be afraid to leave a potential successor in a junior roll in favor of a more committed candidate for the leadership road. The successor should receive clear feedback and performance evaluations during each assignment. It is very important to provide rigorous feedback during the assignments to assure the highest possible performance level for the future of the company. In addition to department head assignments lasting 12 to 18 months, the successor should be included in top level strategy sessions at every level of the organization.
The successor should be given assignments to address important business decision. The owner or founder of the successful small business has to be the main mentor to the successor, and the successor has to be a willing to sign up as an apprentice to the owner. He or she must be willing to accept the role of an apprentice and commit to the role while his or her peers may be leaving the company for what seems to be a better opportunity. The apprentice role requires a level of loyalty and trust that is not seen in the modern workplace. Donald Trump has the right idea on his popular NBC reality television “The Apprentice.
On the show, Donald Trump creates a competition between contestants that want to work in his organization, Trump International. Through a series of leadership projects and business activities, the competitors are eliminated until the last contestant wins the opportunity to work for Trump. According to the rules of the show, the winning candidate receives a generous salary and the chance to work for Donald Trump. The challenges the contestants face can be very uncomfortable because it all happens in front of several million viewers every week.
The winning apprentice learns to trust the mentor (Donald Trump) and receives a good deal of very public feedback and criticism on a regular basis. By the end of the contest, the strengths and weakness of the winning contestant are well documented and known to the mentor. The training and development of the successor should have many of the same parts of the show, and the winning contestant should know what he or she has signed up for before the contest begins. Winning an apprenticeship opportunity with Donald Trump has its own set of concerns.
Donald Trump is at best a controversial figure. He claims to be a billionaire but many suspect is worth is far less, he has had his share of failed business including the bankruptcy of his real-estate empire in the 1980’s, and the collapse of the USFL football league in the same decade. Just as the winning apprentice should be very cautious when fully adopting the business philosophy of Donald Trump, the successor to the leadership of a successful small business should look to fully adopt the core business philosophy and core business values of the company he or she may one day lead.
The business philosophy of a small business is the heart and soul of the company. It is why the business is successful and it assures the likelihood of future success if the spirit of the business philosophy can be preserved. In order for the successor to understand and adopt the business philosophy of the owner or founder, he or she must appreciate the history of the company and the motivation of the owner. The only way to assure the successor adopts the core philosophy of the company is to spend adequate time in critical business situations in order to learn how the philosophy guides the actions of the company.
The core values of the company support the core philosophy of the company and guides the actions and focus of the assets and investment both financial and human capital. The successor has a heavy responsibility to embrace and demonstrate the core values of the company so that the continuity remains. The leadership of the successor is one of the most important factors to the success of a small business succession plan. Once the successor has been identified, the managers and current leaders may feel threatened by the reality that one day they may have to report to this new person as the new head of the organization.
While working in the department the successor should spend a large amount of his energy leaning how to lead his department as a part of the whole company before he or she can lead the whole company. Having the ability to influence his or her department and build loyalties in each department will be very important once the leadership of the company is turned over to the successor. The owner or founder should to pay very close attention to the leadership style of the successor. It is very important to recognize how the successor resolves conflict and deals with employees.
The way in which the successor leads and manages the department assignments is the best prediction of how he or she will lead the company. The owner or founder should spend a lot of the mentor time providing feedback in the area of leadership and management style. Another very important step in the development and training of the successor to take over the leadership of a successful small business is to assure the successor has the business knowledge, exposure, and formal training to meet the needs of the future.
Although it is very important for the Successor to successfully lead all major departments in the company, her or she must be given the knowledge to expend the business in take on new challenges. The successor should be promoted to an executive VP or President role and be put into some formal training or Executive Training program. Many Executive MBA programs serve as a pool of like minded talent where the candidates for the Masters of Business Administrations develops a network of peers he or she can learn new and exciting business success ideas.
A well developed network will support the successor when it comes to finding replacement managers, getting references on key vendors. In addition to developing a network, the executive training will help prepare the successor with the knowledge and skills to meet the challenges of the 21 century. He or She will need to understand the complexities of the new market place where business rise and fall based on the right banking relationship or change in government regulations.
In conclusion, a successful small business that can survive the loss of the owner or leader is rare in the United States. In the case of WT&D, the once prosperous enterprise was brought to an end by the greed of the family heirs and the complete flack of succession by the owner. What would have been the difference in the outcome if James Walter had selected a properly motivated successor to lead the enterprise, protect the core business philosophy, embody the core values, and continue to expand and grow the business?