The Need for Succession Planning
To live well is to work well or display a good activity.
--St. Thomas Aquinas
Unemployment and the accompanying consequences are painfully evident in contemporary America. We are familiar with “outsourcing.” As a consequence of the “downturn,” millions of Americans are suffering financial loss and economic devastation, as well as a loss of confidence in themselves, and perhaps, with equally or greater danger, confidence in what has been understood to be “America” and “American.” In light of our present circumstances, it is apparent that we need to find ways to support the stability, growth, and longevity of the small business sector of the economy. In this effort, we must recognize that human beings are our most valuable resource. We must cultivate and energize the ingenuity, talent, and capability of human beings, so as to discover and realize new ways of “doing business.”
According to Tony Gagliardi of the National Federation of Independent Businesses, small businesses employ seventy-five percent of the American work force. All new jobs are being created by small businesses. The Metro Denver Chamber of Commerce estimates that 97% of the businesses in Colorado are small (100 employees or less). We of the Rocky Mountain Employee Ownership Center believe that the creation, development, and long-term economic viability of small business enterprises is crucial to the stability of common financial well-being.
Small Business and the Future of Employment in Colorado
“Forty percent of small business employers are 55 years or older. Only one in 10 is under 35.” (National Federation Independent Business). Evidence indicates that over half of all small businesses are owned by people who, within the next ten years or less, will, of necessity or desire, no longer be available to run their operations. In the coming years, because of the aging baby-boomer population, mnny profitable enterprises will be put in jeopardy.
According to the Small Business Administration, after an original owner retires or is no longer available to run a business, only 30% of family-owned operations survive past the first year. 12% remain past two years, and 3% continue after three years. Considering the age of the current owner population, and the above stated evidence, 40% of currently operating Colorado businesses will cease to exist in the next ten to twenty years.
We recognize that not all small businesses need or should survive beyond the original owners. Some are not sufficiently profitable. Others may have filled a relatively short-term need and are economically unsustainable. However, one who has lived in a community for many years can usually recall the disappearance of a business enterprise, the continuation of which would have been of significant benefit to that community, not only for the services or products it provided, but also as a source of employment. Churches, schools, health facilities, families, etc., are dependent on a vital business community!
Considering our current economic situation, it is important that we encourage succession planning, as a means, not only of continuing the legacy and entrepreneurial spirit of current business owners, but also as a way of providing employment for current and future citizens of our communities.
“Succession planning” begins when a business owner contemplates the future of his or her enterprise in relation to a desire to retire or a time when he or she will not be available to continue in his or her management position. The options available in circumstances such as these include: 1) sell or transfer the business to a relative, 2) sell the business on the open market, 3) close down the business and sell off the assets, or 4) sell the business to the employees via a co-op or an Employee Stock Ownership Plan or ESOP.
Regarding a cooperative business model, Paul Hazen of the National Cooperative Business Association defines a cooperative as: “A democratically run business whose members are also its owners.” Hazen goes on to say that there are some 29,000 cooperatives in all sectors of the American economy, with revenues that exceed $3 trillion, employing 856,000 people. Household names among them include Ace Hardware, Ocean Spray, the Associated Press and Sunkist.” An ESOP is a plan whereby the employees own part or all of the stock in a trust. Reliable sources of information on Co-ops and ESOPs include: The National Employee Ownership Center, The Ohio Employee Ownership Center, The United States Federation of Worker Cooperatives, and The Vermont Employee Ownership Center.
Reasons for Selling to Employees: Employees Work Harder and
Companies Grow Faster!
Good reasons for selling the business to the employees include: 1) significant tax benefits for the owner; 2).the possibility of the owner continuing as part of the operation; 3) the continuation of the owner’s legacy and the presence of the company in the community; 4) continued job opportunities for faithful employees who have supported the business with their work; and 5) employee-owned companies grow faster!
Gary Tharaldson, founder of the Tharaldson Hotels states: “Research has shown that when employee ownership is combined with a management style that encourages employees to share ideas and information, companies grow 6-11% per year faster than otherwise would be expected” Tharaldson believes that a company of owners will outperform a company of employees – anytime – anywhere...and appreciates the loyal efforts of its employees. Adopting an employee stock ownership program (ESOP) shares the wealth. Colleagues and associates own 100% of the company not through buying stock, but by remaining employed with the company and having stock shares freely allocated to their personal accounts. “Over time, the value of each employee owner's stock account grows, and the longer you are a Tharaldson employee, the larger your account becomes.”
A Kelly Services survey of 134,000 employees found that 61% of U.S. workers say that profit sharing or ownership would motivate them to perform at a higher level. “Profit sharing and company ownership arrangements create a powerful bond between workers and employers and can motivate people to be more productive and creative,” said Kelly Services Executive Vice President and Chief Operating Officer George Corona. “As a global talent shortage looms, employers may want to consider how they can improve the productivity of their work force by offering employment packages that align individual performance to corporate goals.”
Corey Rosen, Executive Director of the National Center for Employee Ownership states: “In the largest and most significant study to date of the performance of ESOPs in closely held companies, Douglas Kruse and Joseph Blasi of Rutgers University found that ESOPs increase sales and employment by about 2.3% to 2.4% per year over what would have been expected absent an ESOP. “
Difficulties in regard to employee-ownership include: 1) The employees may not want or be able to run the company; 2) At best the transition takes time; 3) The employees have to agree to the purchase, to the price, to the financial commitment they will be making and to staying in their jobs for the foreseeable future; 4) Employees will be required to learn how to run the company and how to work as a team in the decision making process; 5) The company must be a financially viable enterprise, making financing possible.
Everyone Succeeds with Successful Succession Planning!
The community benefits if well-run small businesses can be sustained, jobs are maintained, money stays in the community, profits are shared among employees, and companies grow faster!
The Rocky Mountain Employee Ownership Center
Help in succession planning is the mission of the Rocky Mountain Employee Ownership Center. RMEOC is an organizational member of the National Center for Employee Ownership of Oakland, California. For more information please contact Dick Peterson at 303 909-1356, or e-mail firstname.lastname@example.org.