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Archive for June, 2010

Is succession planning irrelevant for small businesses?

Saturday, June 26th, 2010

With most small businesses in the US being family-owned, how important is succession planning to these enterprises? Is it relevant or necessary to them at all?

But just because a business is essentially mom-and-pop, it doesn’t stop it from creating a business policy or plan. A business may be small, but that shouldn’t stop entrepreneurs from running it professionally along the lines of big business. Because, if you keep thinking small, you stand the risk of always being that way.

So, in much the same way, even family-owned small businesses can benefit from succession planning. True, many may not find it comfortable to think of a time when they’re not going to be around, to consider the consequences of ageing, disease, and death.

Also, you may think that as you have always just wanted to sell out the business, you don’t really need to bother with who’s going to take over. But then, consider the fact that with baby boomers retiring at an accelerating rate, the number of small businesses being put up on sale is increasing as we speak. So, selling your business may not be a breeze, and until you sell it, you need to tend to it.

Again, small business owners are often caught up with the daily running of the business and meeting profit targets and so on, but the fact that you have put in so much hard work and time into building your business actually strengths the case for creating a succession plan. After all, you don’t want your lifetime achievement to fizzle away the moment you’re gone, do you? So, plan you must for the following reasons:

Firstly, and this one applies especially if yours is a family-run business, a succession plan ensures there is no bad blood or discord in the family.

Secondly, it ensures that there are no legal complications.

Thirdly, the fact that you have a succession plan in place indicates that you have a clear view of your business’ future. This brings some sort of a predictability or stability in your employees’ minds, rather than leave them guessing about what’s going to happen to the business once you’re not there on the scene.

But to enable a smooth transition, merely naming a successor won’t do and that is not what succession planning is about either.

Ideally, the process of succession planning takes at least five years, so that you can zero in on your successor, work with them and train them, and ensure that the transition is going to be hiccup-free.

Family-run businesses should take care that the choice of a successor is driven more by practical considerations rather than emotional thinking. For instance, it may be someone else in the family and not your first-born who has put in more time and effort in working in the business and understanding it. So, naturally he/she is a more deserving candidate than your child.

People, who are passionate about their companies, will see the point of succession planning. You don’t want to leave it direction-less, in a state of anarchy. You created it, and it’s up to you, and also your responsibility to decide its fate.

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How small is small? Redefining small business

Wednesday, June 9th, 2010

You could argue that it’s all in the mind, of course. But the US government has fixed ideas on such things. You could have 499 employees and you’d still be called a small business, never mind that you are zillions of light years away in terms of size, revenue-earning capacity (and all other measurement criteria) from the really ‘small’ business that has perhaps fewer than 10 employees.

This one-size-fits-nearly-all definition makes 99.9% of businesses in the US small and you wonder why do we need to bother with any classification at all? The definition of ‘small business’ put forth by the Small Business Administration (SBA) does not take cognizance of the differences between micro businesses (lesser than 10 employees), small businesses (10 to 24 employees), medium-sized businesses (25 to 99 employees), and large small businesses (100 to 499 employees). They differ drastically in their ownership patterns, ways of working, problems, the need for resources and the ability to procure them, and so on.

Such blanket terms don’t help anyone, not the ‘big’ small businesses, nor the ‘small’ small ones. But the really small ones would be, obviously, the ones most affected by such a classification.

For instance, when it comes to access to grants and loans from the government, all the so-called small businesses are pitted against each other. In such a race, it’s the proprietor-held company or micro-business that could be hit the hardest, when actually it could be more in need of financial aid than its bigger counterparts.

The 500-employee mark and related dissent have a history to it. The definition actually predates the SBA and was originally used by the Reconstruction Finance Corporation and the earlier Small War Plants Corporation, which was a World War II Government contracting agency channeling Federal contracts to small manufacturers. The House Committee on Banking and Currency in 1957 observed that “the standard of 500 or less employees originated in World War II with several variations. For the want of a better definition, the 500 rule generally gained acceptance in the Government, although in many instances there was considerable reluctance by many Government officials and members of Congress to accept such a rigid formula.”

But it must be mentioned to the SBA’s credit that it has kept on reviewing the definition of small business almost ever since its inception in 1953. Here’s a timeline excerpted from the SBA’s white paper on size standards methodology (linked above):

>> 1959: Size standards regulations distinguished between manufacturing and financial industries. The Agency set 250-employee, 500-employee, and 1,000-employee size standard for its financial assistance programs, but retained the 500-employee standard for Federal contracting programs.

>> 1963: SBA size standards were as follows: $1 million for retail trade industries; $1 million for services industries; $5 million for wholesale industries; and $7.5 million for construction industries. There continued to be two sets of size standards for manufacturing industries – 250 employees to 1,000 employees for SBA financial programs, but basically 500 employees for Federal contracting programs.

>> 1963 to 1975: Many manufacturing size standards were increased to 750 or 1,000 employees and some of the services industries, such as engineering and janitorial services, with size standards of $5 million and $3 million, respectively, were broken to separate industries.

>> 1975: SBA implemented a general increase to its monetary based size standards to account for the effects of inflation. The adjusted standards were $2 million for retail trade and services industries, $12 million for general construction, and $5 million for special trade construction. Employee based standards remained unchanged.

>> 1984: The size standards framework the Agency currently follows was put in place.

Currently, most prevalent size standards are $7.0 million in annual receipts for retail trade and services, $33.5 million for general construction, $14.0 million for special trade construction, 100 employees for wholesale trade for all Federal programs except for Federal procurement where it is 500 employees under the non-manufacturer rule, and 500 employees for manufacturing industries.

Yet, with all the changes along the years, the SBA has still not managed to hit the perfect chord and is currently reviewing its classifications all over again. It is inviting public comment on its proposed three “base” or “anchor” size standards: (1) 500 employees for manufacturing, mining and other industries with employee based size standards (except for wholesale trade); (2) $7.0 million in average annual receipts for most nonmanufacturing industries with receipts based size standards; and (3) 100 employees for all wholesale trade industries.

So, if you have something to say on this matter, this is your chance.

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