Too many businesses lack succession plans
“I started thinking about my employees and my family. I didn’t have stuff taken care of. There was nothing in place to immediately operate the business.” Devin zito, president and co-founder of Teknarus
Like many small-business owners, Devin Zito was so busy worrying about day-to-day operations that he found himself without a long-range plan for what would happen to his company if a tragedy struck.
Zito is the president and co-founder of Teknarus, a Baton Rouge technology solutions company. Zito was participating in a Louisiana Economic Development department program designed to help small businesses grow when he realized he should have a plan in place for Teknarus in case he suddenly had to step away from the company.
“I started thinking about my employees and my family,” he said. “I didn’t have stuff taken care of. There was nothing in place to immediately operate the business.”
Clayton White, founder of Simmons & White, a New Orleans-based management consulting firm that specializes in succession planning, said most business owners are like Zito.
“Based on anecdotal evidence, much more than 90 percent of small businesses have nothing in place,” said White. “It’s a terrible thing. You’ve got employees, customers and family dependant upon your income. You’re putting your kids and spouse at risk.”
The vast majority of the time business owners never think about having a succession plan in place, White said. The problem is if something unexpected happens, a business’ future could be up in the air.
“Even someone in their 30s and 40s with a successful company moving along, what happens if they get hit by a car?” he said. “The earlier an owner starts thinking about that and has some plan in place the better.”
Zito, who turns 38 next week, started Teknarus in October 2000 with a former partner, who later left to become a full-time information technology director. In November, the 12-person business moved into the Louisiana Technology Park on Florida Boulevard.
“We have seen some growth over the years, and we have seen some growth in the wrong direction,” he said. “I wanted to do it in the right way.”
Right now, Teknarus is in the middle of drawing up a business succession plan. The plan is for Zito’s wife, Karen, to get sole control of the company. But that plan can be changed to allow for another person, such as a valued employee at Teknarus, to share control of the business with her.
Zito is drawing up a will and a living will, which will give his wife total control of the business and power of attorney, in case of his death or long-term absence from Teknarus.
“I’m making sure someone else can sign checks and keep the company running,” he said.
Ralph Stephens, a tax director with Postlewaite & Netterville who helps individuals draw up business succession plans, said it’s a good idea to leave room for some options.
“Often, this is a process that takes place over years,” he said.
Stephens said part of the reason that developing a business succession plan can take so long is that there are so many options today for people who own a company and want to get out of the business.
“Historically, if someone had a successful business, there were a couple of things they could do: the business could go to a family member, the employees could have it or it could be sold to an outside third party,” he said.
But now venture capital firms are looking to buy businesses. And there’s always the possibility of taking a company public, Stephens said.
Zito said he has a “loose goal” to finish his business succession plan by the end of the year. Developing the plan will not only provide Teknarus with a guide for operations in his absence, but it also has some intangible benefits.
“If we start looking at opportunities for investors, potential partners appreciate that kind of planning,” he said. “They like to see that a business’ house is in order.”
White said that while developing a business succession plan sounds simple on the surface, it can be complicated in the details. For example, if a business owner wants to turn over the company to a valued employee or a child, he needs to start working with them years in advance to make sure they understand all of the operations.
“There’s a big problem when you start vesting a business to a key employee, you need to train them in management of the company,” he said. “They need to make the switch immediately. That’s a big hurdle to cross.”
Stephens said a business succession plan is a mix between legal documents, such as paperwork giving someone the right to take over a company in case of emergency and non-compete clauses for key employees who may take over the firm, and guidelines.
“It’s not a cookie-cutter,” he said.
But the important thing is to start planning early and letting family members and key employees know about their role in future operations, Stephens said.
For Zito, developing a succession plan fits in with his vision of Teknarus being about more than just him.
“I want this company to transcend beyond me,” he said. “If one of my kids takes over or an employee takes over, I want this business to be bigger than who I am.”