MBN USA

October 29, 2021

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Who’s got next? Succession planning vital for future success of MBEs

By Melissa Lowery

Entrepreneurs and small-business owners are the backbone of the American economy. They pour their blood, sweat and tears into starting and growing businesses. But amid the excitement and sacrifice of building something of their own, often planning for the business’ next generation is ignored.

According to the National Association of Corporate Directors, fewer than one in four private company boards say they have a formal succession plan in place. Those numbers are even lower for minority-owned businesses.

Stephanie E. DeVane, vice president of entrepreneurship and business development at the National Urban League, asserted that the value of succession planning goes beyond the business owner’s legacy; it is vital to the economic success of communities.

“Succession planning is the best way to ensure that a business has the best people with the right skills and experience in place to lead it for future success,” she said. “For Black-owned businesses, it’s even more critical — in order to preserve mainstays of these communities and thus, continue to build and maintain Black jobs and create wealth.”

A business without a succession plan risks disruption, uncertainty and conflict, along with endangering future competitiveness. For companies that are family-owned or -controlled, the issue of succession also introduces deeply emotional personal issues and may widen the circle of stakeholders to include nonemployee family members.

In the next decade, we will see substantial transfers of wealth through business ownership handoffs across generations and other new ownership structures as the younger baby boomers and older Gen Xers retire. The long-term survival of those businesses — and the preservation of the wealth they have built — hinges on succession planning.

Stability and continuity

Any business owner knows that success is built on continuity, from standard operating procedures for creating their products or services to building relationships with clients and customers to retaining top talent. Succession planning is about long-term continuity, ensuring that a business continues to survive and grow after the founder departs.

Lamont Robinson, director of supplier diversity at pharmaceutical giant AmerisourceBergen Corp., spoke from the corporate procurement angle, noting that suppliers actively pursuing succession plans are more attractive than those leaving the future up to chance.

“You don’t want to dedicate resources to develop diverse suppliers only to have that go away because they didn’t have succession plans,” he said.

But minority business enterprises without established succession plans are not automatically precluded from doing business with a company like AmerisourceBergen. In the interest of building a strong, diverse supply chain, Robinson said he and his colleagues at other large companies can help diverse suppliers with that part of business development.

“Corporations like ours have the resources internally or via partners to help [suppliers] develop succession plans,” he said. “At AmerisourceBergen, if you are wanting to grow strategically with us, we are open. We want to prepare you to do business with others in health care. The more successful you are, the better it is for all of us.”

Competition is necessary for a robust economy, and diverse small businesses are vital to competition. Tom Sharbaugh, a law professor and director of the Entrepreneur Assistance Clinic at Penn State Law, noted the impact when small businesses are purchased by outsiders.

“The buyers of many family-owned and privately-owned businesses are private equity funds that often close recently acquired businesses by merging their operations into other companies in their portfolios,” he said. “This [merging] results in significant community disruption as jobs are moved and factories, warehouses and other facilities are closed.”

The loss of MBEs can have a tremendous negative impact on a community through loss of tax revenue, loss of community involvement such as sponsorship of youth sports and cultural events, youth moving away seeking better opportunities and the erosion of the community culture itself. In addition to succession planning for MBEs, Sharbaugh proposed a solution that maintains stability within the community, while also increasing minority business ownership.

“Communities could reduce this disruption by promoting the transfer of ownership to local minority entrepreneurs through such efforts as favorable financing, preferred supplier arrangements and business mentoring,” he said.

Emergency preparedness

Small-business owners are often focused on the short- and near-term, working toward meeting client needs and achieving year-over-year growth. Succession planning can seem like something for the distant future — a promising idea but not as urgent as filling that next order and developing that next product.

But what if something happens to you, the business owner, which prevents you from leading your company? Or a life change occurs, changing the family dynamics?

“No one plans for the day a death or disability or even divorce will turn a business upside down,” said Eido Walny, founder/managing attorney of Walny Legal Group LLC, an estate planning boutique law firm in Milwaukee, Wisconsin, to PNC Financial Services Group Inc. earlier this year. “So, the best time to plan for those events is well before they become a reality. That is especially true if there are multiple owners in the business. You want to plan so that you are not accidental partners with someone’s ex-spouse or even their children.”

Robinson of AmerisourceBergen agrees, both as someone with 17 years of experience in procurement and as a small-business owner himself. “You owe it to your employees to have a succession plan,” he said.

A succession plan means you have control over what happens to your company, including your employees, whether the transition comes after decades of successful leadership on your part or in an emergency.

Generational wealth

Business ownership is one of the cornerstones of building generational wealth. In a white paper titled “Bridging the Divide: How Business Ownership Can Help Close the Racial Wealth Gap,” Joyce Klein, director of Business Ownership Initiative at The Aspen Institute Inc., wrote that “In recent years, entrepreneurship has shown to be a potential means to address the racial wealth gap — both because of the apparent relationship between business ownership and wealth and because of the opportunities for higher levels of wealth and wealth mobility for Black entrepreneurs.”

However, in a brief published in March 2021 titled “Small business ownership and liquid wealth,” researchers at JPMorgan Chase & Co. noted that business ownership alone does not guarantee wealth for Black and Latinx entrepreneurs. The obstacles many minorities face when starting a new business — especially lack of access to capital — often lead to business closure in less than three years.

“Encouraging new small business starts alone may not close the liquid wealth gap, and policies that support small businesses should consider differences in the liquid wealth available to small-business owners,” the researchers conclude.

The success rate for new businesses is low, and for minorities, that rate is even lower compared to the success rate for existing businesses. With a record number of baby-boomer-owned businesses transferring ownership in the next decade, Penn State’s Sharbaugh sees an opportunity to build generational wealth for minorities.

“Although startups receive a lot of attention as a way of increasing minority ownership and economic development, the yield may be greater with a program to pass ownership to minority entrepreneurs when the existing owners of family-owned and other privately owned businesses decide that it is time to sell their businesses,” he said. “The large financial institutions that have announced their interest in pouring tens of millions of dollars into promoting minority business enterprises could use those funds to provide favorable financing for transferring ownership of existing businesses.”

Whatever form your succession plan takes, economists, financial and legal advisers and business owners all agree: The time to develop and implement the plan is now. Not only are you protecting your legacy, but also you are building generational wealth for your family and your community.