HIGHLIGHTS

• Many business owners lack a succession plan, and owners do not have a common understanding of what it means to have a plan.
• Our research showed that several factors hold business owners back from planning. What’s more, business owners do not appear to consider the full range of exit options and may be overly optimistic about the feasibility of their preferred plan.
• These insights can inform efforts to encourage more business owners to create a well-thought-out plan and support long-term prosperity for business owners, workers, and communities.

 

The Challenge

Succession planning helps ensure a small business thrives beyond its current owner. Without succession planning, businesses are vulnerable to unplanned disruptions that can have ripple effects on local jobs and economic stability. The vast majority of small businesses in the United States operate in industries characterized by low wages and shift work. As a result, succession planning decisions have far-reaching implications for the financial health of workers, who often earn low-to-moderate incomes (LMI) and are more likely to lack a savings cushion and live paycheck to paycheck (or even shift to shift). 73% of privately held companies nationwide plan to transition ownership within the next 10 years, so ensuring these transitions go smoothly is an urgent endeavor.

Despite the risks associated with unplanned exits, approximately 60% of small businesses–nearly 20 million businesses–lack a documented succession plan. Creating an effective plan requires business owners to identify their priorities, explore exit options, and ensure their business is ready for a transition. While it’s well-known that many small businesses lack a succession plan, it is less clear why. How do business owners view succession planning, and what are the barriers preventing them from establishing a plan?

Our Approach

To answer these questions, ideas42 conducted a survey of 300 small business owners, complemented by in-depth interviews with 18 additional owners. The survey and interviews focused on owners of businesses with revenues between $1-16 million that employed at least one person in addition to the owner. These businesses—spanning the retail, wholesale, and healthcare industries—are small enough that they’re unlikely to have access to sophisticated business advising, but large enough that their closure could have significant ripple effects. 

The survey shed light on business owners’ current succession planning practices, what prompts owners to plan, and where they look for information or advice about succession planning. It also explored factors business owners prioritize when thinking about succession planning, factors impacting their ability to effectively plan, and their perceptions of different exit options. Interviews highlighted individual business owners’ experiences and deepened our understanding of trends that emerged in the survey responses. Survey and interview findings informed recommendations for stakeholders interested in encouraging succession planning.

Results

This research generated a wealth of findings, which we organize into five themes: planning status, influencers and stakeholders, priorities and motivations, limiting factors, and exit options. Below, we summarize each theme and provide recommendations, informed by behavioral science, for overcoming the associated barriers. To explore beyond the highlights, we recommend readers review our insights slide deck, webinar recording, in-depth survey findings, and in-depth interview findings.

Planning status: 50% of business owners reported having a specific and detailed succession plan. Business owners did not have a common understanding of what it means to have a plan or use consistent vocabulary (e.g. succession, transition, exit, etc.).

• Recommendation: These findings suggest that small business owners have a range of mental models about succession planning, and any effort to encourage succession planning should be flexible and adaptable.

Influencers and stakeholders: Small business owners wanted to learn more about the succession planning process, with many wishing they had been prompted to think about it earlier. The research identified a number of stakeholders well-placed to prompt business owners to plan. Trust likely plays a role in who owners choose to confide in and learn from: the top stakeholders were professionals with whom business owners already interact or that have specialized knowledge, both of which engender trust.

• Recommendation:  Key influencers should be aware that owners look to them for guidance, and integrate planning discussions into existing relationships and touchpoints.

Priorities and motivations: Business owners wanted to preserve the legacy of their business—58% prioritized business continuity and safeguarding the business’ values over financial concerns. Many owners view planning as a means to achieve these goals; however, they don’t always act on that intention. 

• Recommendation: Approaches grounded in business owners’ goals for their business and their own lives, and that frame succession planning as a tool to ensure a business’ legacy, would likely resonate with business owners.

Limiting factors: Most business owners are aware of succession planning, intend to create a plan, and report understanding how to do so. However, they do not view planning as urgent. 63% of business owners without a plan stated it was “too early” and 45% felt “too busy” running their business to get started.

• Recommendation: Messaging that highlights “it’s never too early to plan” and tailored guidance at all stages of the business could help correct misperceptions about the optimal timing to begin planning. Providing step-by-step guidance and framing succession planning as a normal, manageable–even stress-relieving–process could reduce hassles and help business owners act on their intentions.

Exit options: Business owners reported that they understand and feel satisfied with the available exit options; however, they appear to prioritize options with which they have personal experience. Few said they were considering less traditional options, such as employee ownership. While this familiarity bias is not surprising, it likely contributes to business owners having inadequate succession plans. Additionally, business owners may be overly optimistic about the feasibility of their preferred plan. For example, 54% of business owners planned to transfer ownership to a family member despite the relatively low rate of family businesses that survive into the next generation. There was also a significant gap between the proportion of owners that planned to use a broker to identify a buyer versus the rate at which owners who successfully identified a buyer relied on brokers.

• Recommendation: Encouraging business owners to expand their choice set—by exploring the full range of exit options and developing alternative plans in addition to their ideal scenario—may increase their odds of success.

Takeaway

These findings offer a window into business owners’ minds and represent a first step toward encouraging more business owners to create a well-thought-out plan. A wide range of stakeholders recognize the need for more widespread attention to succession planning, and this research confirms that business owners also see its value. Approaching these insights with a behavioral lens can inform outreach and efforts to support business owners in navigating the process, with the ultimate goal of reducing unplanned exits and supporting long-term prosperity for business owners, workers, and communities.

To learn more about this work, contact us at financialhealth@ideas42.org.

This work is supported by JPMorganChase.