“She could have brought someone in a few years before and trained him or her, which would have given her business value and enabled it to continue,” Crowell says. “Instead, the business ended when she died suddenly, leaving no money from it for the estate.”
According to Wilmington Trust, 58% of the owners of small businesses do not have a business succession plan. Even many financial firms do not have a plan. “It’s the classic case of the cobbler’s children having no shoes,” Crowell says. Advisors say they have seen little improvement in the number of successful succession plans over the years.
Nearly half (47%) of small business owners over age 64 do not have a plan in place, Wilmington Trust says. Yet 67% of the 200 owners of privately held companies included in the firm’s study acknowledged it is important to have a plan if they are aging, while 55% said it is important in order to provide security for their families.
According to the Conway Center for Family Business, a nonprofit organization in Columbus, Ohio, that provides education and resources for family business owners, 70% of family businesses do not make it to the second generation. Only 12% make it to the third generation, and only 3% make it to a fourth.
Yet business owners have a lot of reasons to want their firms to continue after they leave.
Survey respondents said it is important to make sure their companies survive into the future to take care of employees (87%). Others said it is important to make sure the company retains value and that family harmony is maintained. Owners also want to reduce their tax burden and achieve valuation goals.
At the same time, nearly 40% want to keep the business within the family. But all of this may be impossible without pre-planning, advisors say.
“What business owners need to realize is the sooner they start planning, the better their odds of achieving their goals—both financial and personal,” says Matt Panarese, president of Wilmington Trust’s Mid-Atlantic region and leader of the firm’s National Business Owner Practice Group.
Owners have ambitious goals for their businesses and they know the importance of planning for the future, but there are a lot of excuses about why the majority do not do the planning, the survey shows.
“Business owners do not like to envision a day when they can no longer aggressively direct a company they have developed,” says Terry Duncan, president of Duncan Management Inc., a business development company in Forney, Texas. “To start admitting they are not going to be around forever is a big hurdle to get over. They have to be willing to turn over the reins and let the new person make some mistakes.