Advising Small Business Owners in a Pandemic: Succession Planning Should be Priority Number 1

Because succession planning can often be too tough for those lower in the leadership ranks to bring up, especially in family-owned businesses, a financial advisor may be most helpful as the trusted, neutral intermediary.

Right now, small businesses are at high risk. As reported by Axios “"There is no doubt that the longer this pandemic pulverizes this economy, the main victims will be small and mid-sized companies," Bernard Baumohl, chief economist at The Economic Outlook Group, tells Axios.”[1] This is on top of the already strong predictions on turnover in small businesses. Some analysts predict that by 2029, all baby boomers will be over the age of 65, leaving the businesses they’ve started and/or driven for the last decades in need of transfer or transformation.

Many small business owners don’t have a retirement plan because they don’t have a succession plan for the business they own. For those small businesses that are operating, they may feel a great deal of guilt thinking about retiring as that may leave employees without jobs in a job market that may take years to stabilize.

And to carry the pulverization forward: Small businesses with 401k plans generally lack succession plans. While research suggests that only 18% of small business have 401k plans, almost 60% of small businesses lack a succession plan. Combining those two data points results in a fair number of small businesses with potential succession problems. As noted above, the death of a small business owner/sole proprietor has the potential to create a nightmare for the estate administrator if that small business owner is the only trustee on a plan. It’s worth remembering that “small business” doesn’t always mean small plan. Small businesses, according to the federal government’s Small Business Association, are those that fall within the definition of “500 employees for most manufacturing and mining industries and $7.5 million in average annual receipts for many nonmanufacturing industries.”  

The problem with succession planning often lays  in getting started. “…Family business leaders ranked succession as the second-most-important subject on the their minds, …. Even so, our research found that more than 40 percent of family businesses have not adequately prepared for succession during the past decade….. poorly planned successions can harm revenues, market capitalization, and margins.”[2]

Because succession planning can often be too tough for those lower in the leadership ranks to bring up, especially in family-owned businesses, a financial advisor may be most helpful as the trusted, neutral intermediary. Broaching the subject and ensuring a fulsome discussion could be immensely beneficial to small business clients. Advisors may benefit from learning mediation techniques such as having each individual involved in the discussion identify ahead of time their expectations as well as submit what they view as important documents, like program plans, financial sheets or other key planning documents. Another mediation technique advisors may find helpful is to move from group to private discussions and back again as needs arise within the same meeting. This can be as simple as moving to breakout rooms in a Zoom meeting or having multiple conference rooms if the parties are live.

Succession planning should be an iterative process. As PWC noted recently: “In many cases, however, these [succession planning] efforts are focused only on a handful of high-potential executives who are considered next-in-line for C-suite positions. Beyond that first or second organizational layer, the succession planning team typically has only minimal awareness of the employees who actually produce results for the company – the “pivotal talent” that makes the organization successful.”[3] Advisors may be able to take the sting out of the succession planning process by making it a yearly process. That is, it may help to have a succession process that continually identifies both needs as well as potential talent.

Succession planning is also vital for 401k plans and their named fiduciaries. Under Department of Labor (“DOL”) regulations, every 401k must identify at least one fiduciary in the written documents given to plan participants. That fiduciary can be identified either by name or be described by their office. Some plans have an administrative committee or have the company’s board of directors act as a fiduciary. Often, a plan’s fiduciaries will include the plan’s trustee, several investment managers and a plan administrator.

Plan trustees have several well-known duties: they must see that the plan is administered in accordance with the plan governance documents; they must administer the plan for the exclusive benefit of the plan participants and their beneficiaries; in administering the plan, they must exercise due care and skill; they must diversify plan investments; they must prevent the plan from engaging in prohibited transactions; and value plan assets at fair market value. Additionally, the DOL has stated that it is a fiduciary’s responsibility to ensure that there is a successor in place before that fiduciary leaves. As the DOL has stated:

Fiduciaries who no longer want to serve in that role cannot simply walk away from their responsibilities, even if the plan has other fiduciaries. They need to follow plan procedures and make sure that another fiduciary is carrying out the responsibilities left behind. It is critical that a plan has fiduciaries in place so that it can continue operations and participants have a way to interact with the plan.[4]

On the ground level, plan trustees, along with plan administrators, may have some level of administrative duties. On investment accounts, trustees can be designated as Authorized Individuals for accessing investment information or other information stored by the financial advisor. Some companies maintain records of plan participants that can be accessed only by those Authorized Individuals. It’s imperative that in pandemic the number of authorized individuals be updated and potentially expanded as it is possible that many folks could be incapacitated at once for a lengthy period.




[4] Department of Labor, “Meeting Your Fiduciary Responsibilities,” February 2012, p. 11

These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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