Pandemic emphasizes weaknesses

Comprehensive financial planning for business owners covers a vast array of topics that address personal considerations while ensuring the company’s future growth. Yet too many smaller businesses are overlooking critical components of a robust business plan.

The scope of financial planning for business owners is broader and more complex than similar work done for families. Budgeting, cash flow, tax mitigation, retirement preparations, and estate planning are significant topics that both individuals and businesses should address. However, business owners also need to think about how their companies will continue to function once they step down from daily management duties. Businesses should also address risk management through such measures as contingency planning and business continuity planning.

Business owners face choices between exit planning and succession planning to keep the enterprise functioning. Exit planning can prepare owners to either sell the business to a new owner or shut down operations. Succession planning could mean bringing in a new owner who will take over the management responsivities or passing your company on to one or more family members. If the exit is many years in the future, entrepreneurs may want to evaluate both options to be fully prepared.

Fifty-three percent of global companies do not have a contingency plan in place for CEO succession, including 69 percent of small companies (less than $50 million in revenues), the Harvard Business Review recently reported. A 2021 survey by the Society for Human Resource Management found that 46 percent of HR professionals at smaller companies reported their firms did not have a succession plan in place, versus 31 percent at medium-sized organizations and 27 percent at large ones.

The COVID-19 pandemic has intensified the urgency for companies of all sizes to prioritize succession planning. The Harvard Business Review noted that, as CEOs tend to be older than other workers, they are at greater risk for contracting COVID-related illness. While CEO succession draws more attention among large publicly-traded companies, the need for succession planning is also important for the 99.9 percent of U.S. enterprises that the U.S. Bureau of Labor Statistics classifies as small businesses. Among those 31.7 million small businesses, the vast majority are family owned.

Family Succession Planning

One useful approach for succession planning within family-owned businesses is setting up a limited liability corporation, according to Sam Brownell, CVA, CFA, MBA, managing director of Stratus Wealth Advisors, LLC, in Kensington, Maryland.

“In our succession planning work with independent business owners, we often advise families to set up family LLCs so that older generations can teach their heirs about prudent management of family assets,” Brownell said. A family LLC allows members of multiple generations to share thoughts on business and investment strategy, he continued. The method also empowers younger generations to take part in the decision-making process.

“This approach can provide the foundation for communication and trust that is vital to a family business surviving for many generations past its original owners and continuing to provide valuable employment opportunities and resources to the communities it serves,” Brownwell added. “Many family businesses do not survive past the first two generations because there is a lack of communication about the values that built the family wealth.”

Poor communication with members of younger generations is one of the biggest issues Stratus Wealth Advisors encounters in succession planning for business owners, Brownwell said.

“This lack of communication leads to a lack of trust between generations,” he explained. “Important issues, such as inventory management and raising capital, are often not effectively taught to future leaders. Furthermore, there are often preconceived notions of the strengths and weaknesses of younger people – many of which are not based in fact.”

Brownwell said the best starting point for many succession planning engagements is sitting down with all the key stakeholders to hold an open and honest conversation about each person’s goals.

“We find that opening these lines of communication can help the older generation gain more confidence that the younger generation is committed to upholding the company’s values,” he added. “It can also help the younger generation have more confidence that the older generation is actually planning to transition ownership to them.”

Dr. David D. Spaulding, DPS, CIPM, CEO of The Spaulding Group, Inc., in Naples, Florida, stresses the importance of succession planning for his clients as well as for his company. Spaulding said the financial consulting firm has not only created its own succession plan, but has also been actively implementing the blueprint.

“As the company’s founder, I made it a point to expand responsibility for day-to-day operations several years ago,” Spaulding said. “Thus, our company president and chief operating officer has a great deal of responsibility, as does our chief growth officer. This has proven very beneficial. Ownership in the firm has also been extended to several key employees”

While Spaulding said he has no current plans to retire, there are no guarantees of how long he may be able to continue working. By putting a succession plan in place and shifting responsibilities to key leaders now, he added, he is confident the firm will continue having a strong life and be able to serve its clients and the industry.

Prioritizing Business Continuity Plans

The COVID-19 pandemic also reinforced the need for businesses to create business continuity and disaster recovery plans to anticipate potential challenges. In 2021, global consultancy firm Accenture reported that 71 percent of the companies it surveyed did not have a business contingency plan for a crisis that lasted more than a few weeks. As with succession planning, business continuity plans are more commonplace in larger organizations than in small businesses.

At The Spaulding Group, “We established a business continuity plan years ago,” Spaulding said. “We just never thought we’d need to implement it, nor that it would last as long as it has.”

As a result, the firm made some bold changes in how it carried out certain client assignments, such as audit-type work, training, and conferences. Currently almost all of company’s activities are done remotely, Spaulding continued. However, meetings and conferences recently shifted to a hybrid approach that allows some clients to choose being on-site while others participate remotely.

The firm has also strengthened its technology, providing all team members with the tools and interfaces they need to work from their homes. He noted that, although several team members come into the office at least one day per week, many will continue operating remotely in the future.

“While parts of our business suffered a bit as a result of the pandemic,” Spaulding added, “for the most part, we’ve done extraordinarily well.”