Succession plans help answer what-ifs

  • Associated Press
  • Thursday, September 9, 2004 9:00pm
  • Business

As the leading edge of baby boomers moves toward retirement, many people with small businesses need to start thinking about succession plans or exit strategies.

Succession planning means more than deciding to whom to sell the company. A plan should be written years before an owner is likely to sell, and it should deal with issues such as who will run the company if the owner dies or is incapacitated. In the case of a partnership, the owners need to decide what will happen to the business if a partner leaves or dies.

An unexpected resignation convinced Mindbridge Software of the need for a plan.

“We had someone in the organization that was very valuable who ended up leaving and we didn’t have a succession plan in place,” said Scott Testa, chief operating officer of the suburban Philadelphia-based firm that creates internal communication software for businesses. “We felt if we had something in place, we would have been better able to deal with it.”

Now, Testa said, “we are identifying some of the succession gaps, looking at some of our future staffing needs and trying to get our arms around where we have the gaps and where we need to fill them.”

Many companies do their succession planning more informally. At Croton Watch Co. in Moonachie, N.J., vice president Eli Mermelstein expects to be the third generation in his family to run the company, which was started by his grandfather, Ernest, and which his father, David, now heads.

There isn’t a written succession plan in place, but it has been clear for some time that Eli Mermelstein is being prepped to take over the business some day.

He said of his father, “for the past five years or so, he’s been telling me that he wants me to get more involved … to oversee different aspects of it so I could learn the business.”

But Eli Mermelstein, who worked in the jewelry business by himself before joining the family firm, doesn’t expect to take it over anytime soon – he is 27 and his father is 52. His grandfather at age 80 still comes in every day.

Professionals who advise small businesses say succession planning should be an integral part of running a business.

That’s the approach of Intellinet Corp. At 38, CEO Frank Bell isn’t near retirement. But when he hires a new employee, he bears in mind the fact that this person might be in a management position at some point.

“That approach from day one has helped us develop a great team of leaders,” said Bell, whose information technology firm is based in Atlanta. “I’d hope they could run the business without me.”

“Even at a young age, you have to think about these things, if the business is going to survive,” Bell said.

Any business owner putting together a succession plan should consult a lawyer or accountant because of the legal and tax issues involved.

Testa’s company turned to consultants for advice. “Sometimes you’re so close to the situation that maybe you can’t look objectively” at what needs to be done, he said.

Ned Minor, an attorney in Denver, said there are several steps an owner should go through in creating a plan.

First is to set what he calls exit objectives, which involve deciding how much money an owner wants to take out of the business. Exit objectives also involve deciding who the likely buyers are – family members, employees or a third party.

The second step is to set a date. Third, start working to increase the value of the business, so it will bring as high a purchase price as possible. “You want to exit at the top of your game,” Minor said.

You also need to decide whether you want your money up front, or if you’re willing to cash the business out over a period of years by selling to family or employees.

Minor said he finds that most business owners hope to use this last option, but many end up selling to outsiders. While selling to people you know has an emotional appeal, he said, that often means keeping a close eye on the business even after you’re retired to be sure the company doesn’t run into trouble and pose a threat to the money you still have invested.

For Steve Stroub, who is 56, the idea of selling his company to key employees is extremely attractive. Stroub doesn’t have a plan in place yet, but has consulted with accountants and had his Sausalito, Calif., company, Stroub Construction, valued.

Like many people who started their own companies, Stroub wants to see his business end up in what he considers the right hands.

“This is my baby and I’ve grown it,” he said. “I’d like to keep on the legacy – we’ve got a great reputation and have been around a long time and I’d always like to keep my loyal employees. They’ve put their life in the company.”

Small Business is a weekly column on small business topics by The Associated Press.

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