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Small Business Succession Planning Secrets

I spent last weekend in eastern Montana with a handful of third and fourth generation farmers and ranchers, relatives of my wife.

Truly beautiful country. Awesome. At one point, I stood on bluff overlooking the land that Sitting Bull and his followers traveled through after the Battle of Little Big Horn. At the foot of the hill, one could still make out tee pee rings.

Part of the weekend revolved around my wife visiting the farm and ranch she and her brother inherited. And because of that activity, two of the family patriarchs shared their thoughts and hard-won wisdom on succession planning for farms and ranches.

On its face, all this seems to have little to do with small business succession planning in general. But the more I turned over their comments, the more I think their thinking applies to other small businesses. In particular, two of their comments stand out.

Successful Small Business Succession Planning Prioritizes Continuity

A first big observation: I think these “generational” farmers and ranchers make successful succession the big priority.

In other words, they view their farm or ranch not as an investment to cash when it suits their own financial objectives. Rather, they view their farms and ranches as a legacy they received… and a legacy they will someday pass on.

This change in mindset, perhaps predictably, shows up in at least a couple of places.

First, the price you “sell” a farm or ranch you’ve been the steward of isn’t simply the high bid. Rather, the price is the amount that works for next appropriate steward.

Second, the “working condition” of the farm or ranch you pass on to the “next steward” really matters. The whole show needs to be well-maintained and “ready to go” for the next person who climbs up into the tractor seat.

By the way, this perspective of perpetuity isn’t something that just farmers and ranchers think. Experts in other industries talk the same way.

One example? Marc Rosenberg a long-time consultant to the public accounting industry counsels CPA firm partnerships to focus on what enhances the firm’s continuity when thinking about succession planning.

To paraphrase Rosenberg, he suggests the individuals in a partnership make their money (a) by earning impressive partner incomes and (b) getting a nice windfall when they sell to the next generation of partners. But all this needs to occur, he argues, within the context of what works to enhance the long-term continuity of the firm.

I like this sort of thinking. And even if it doesn’t optimize the financial returns for the business owners, I think it improves the chance of a successful succession. But more on this in a few sentences.

Lots of Time to Transition

Another small business succession planning “success factor” these farmers and ranchers pointed to? The long lead time required to transition from one generation to the next.

For the next steward, patiently waiting in the wings, the long lead time probably sucks. But a long lead time makes sense. Running any complex, capital intensive business in a mature industry requires the owner to possess lots of capital and knowledge. Someone doesn’t accumulate the needed resources in a few weeks, months or even years.

A sidebar… If you’ve ever poked around the “small businesses for sale” listings at someplace like www.bizbuysell.com you’ve seen the seller offers for things like “two weeks of free training.” Or some similar suspiciously short time to transition. You got to wonder and worry about that, right? I mean, if you’re the next man up. (How strong is a firm’s competitive position if ownership requires a modest amount of cash and two weeks of training?)

So back to the farmers and ranchers… Yeah, you don’t learn this business in a few days or weeks. You’re talking years. And their planning reflects that.

And then one other comment related to the transition. The ultimate hand-off isn’t abrupt. The new steward receives continuing support from the previous steward. Dad or mom, grandpa or grandma, or uncle and aunt help the next person running the farm or ranch. As long as necessary or able.

A Crazy Hunch to Close

I’m going to close by sharing a crazy hunch … and let me again point out we’re talking here about farms and ranches that families have held for century or close to it.

You might wonder if someone (like you or me) planning succession the way these farmers and ranchers do leaves too much money on the table. Why not just “sell out” at some lucrative point if the payoff gets big enough.

Fair enough… But maybe a long-run perspective, maybe prioritizing firm continuity and longevity, actually optimizes owner financial outcomes, too.

Someone who views their ownership of a small business as stewardship probably thinks longer term about both the firm and their own personal finances.

He or she, for example, probably strengthens the business’s brands. And reinvests for the long haul.

Further, a firm that operates in this manner probably projects this mindset to employees and customers and vendors. That can’t hurt the firm. Very likely it helps.

Continuing with this idea, maybe a small business that operates with a long-run view and with high efficiency provides better profits  along the way. Which presumably means years if not decades of higher incomes.

Finally, if from the very start, the business owner plans to build wealth not just inside the business but also outside the business, well, that probably enhances the owner’s personal finances.

It all makes you think, right?

Other Related Articles

The Big Benefits of Entrepreneurial Longevity

The 50-something Entrepreneur’s Last-minute Retirement Plan

Perpetuating a Family Business (a blog post about the oldest continuously operated family business in the U.S.)

 

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