Small business owners are a passionate bunch. Generally speaking, they start businesses with a deep enthusiasm for a product or service and work themselves to the bone to make sure the operation is successful. But what happens when they want to leave?
This question is top-of-mind these days with Steve Jobs’ highly publicized medical leave. Pundits around the world are asking: what will happen to Apple? Will the company survive and thrive in a post-Steve Jobs world?
This is an important question for all small business owners to consider… one not often addressed, according to Ron Sturgeon, president of MrMissionPossible.com, a small business consultancy in Fort Worth, Texas.
“By the time small business owners are thinking about this, it is almost too late to start planning,” he says.
Contingency planning includes more than just succession issues, i.e. death of a business owner. It encompasses situations where business partners want to skedaddle, an integral member of a leadership team switches jobs on short notice; a major fallout occurs between co-owners… and the list goes on.
“Most small business owners aren’t thinking about what would happen ‘if,’” says T.J. Van Voorhees, co-founder of Pacific Crest Group, a business consultancy based in Larkspur, California. “Instead, they are wrapped up in day-to-day operations.”
Here are a few things to keep in mind when developing a contingency plan:
When a person starts a small business, everything depends on them. Over time, it is important to take out those dependencies by documenting and instituting processes.
“Whenever a business owner sees themselves as a major component of the business, that isn’t good for contingency planning,” says Van Voorhees. “The first step to developing a plan is to start extracting yourself so the business can run on its own. Document how you do things so others can replicate those processes. Make sure to write detailed, step-by-step policies and procedures.”
Consider buying your office space
Worst-case scenario: you pay rent for an office space for 20 years and the bottom drops out of the market leaving you with a valueless business and no building equity to stand on. Gulp.
“If you can buy your real estate, do it,” advises Sturgeon. “That way, you will always have an asset to survive on. Real estate is much less volatile than your business itself.”
Draft an operational will
No one likes to talk about death, but if something does happen to you, it is important to have all of your bases covered.
“Draft up an operational will,” suggests Van Voorhees. “In it, explain exactly what you want to have happen in your business in case of a tragedy, and make sure it is detailed. If you want a key employee to step into your place, write that down. Or if you absolutely do not want someone to take your place, write that, too.”
Within the will, make sure to specify who will have control of the business and who will own the business… possibly two different people.
“Lets say a business is owned by a husband… a lot of times the wife isn’t in the picture so she has no idea what to do when he dies,” says Bill Watson, owner of Advanced Business Group, a business consultancy based in Nashville, Tennessee. “The entity’s ownership doesn’t have to change, but the control of the business can change to a partner or another leadership team member. You really need to look at who will have the control if something happens. Otherwise, the business can devalue at a very rapid rate.”
Clean your books
Small business owners are notorious for mixing business and personal expenses. A simple trip to the grocery store can easily turn into an all-out office supply shopping spree. This can prove problematic when creating a contingency plan.
“If a business owner wants to leave or dies and he or she has been paying for all sorts of personal expenses through the business, that will have a dramatic affect on the value of the business,” says Van Voorhees. “Make sure your books are clean at all times.”
Empower key employees
If you are an inspiring leader, chances are you have key employees who are staying around in large part because of you. The minute you leave, they may start trolling the job boards for an exit. This can prove disastrous for a business’s future success.
“It is really important to identify your key employees and empower them,” suggests Van Voorhees. “You may have policies and procedures in place, but if you don’t create an environment that helps them stick, the value of the business can go down when you try to liquidate.”
How do you incentivize them to stay?
“Consider giving them stock ownership, power in the company or extended profit sharing,” he recommends.
Protect your assets
Consider establishing trademarks and patents, even of intellectual property.
“Most small business owners are so focused on the operational aspect of their business that they are not paying attention to risk management issues,” says Van Voorhees. “Protecting your assets is an integral part of developing a contingency plan. Intellectual property includes policies and procedures. Make sure you have those trademarked and patented, so they can’t be acquired by employees or contractors.”