January 19, 2020
Succession planning is needed in rural North Carolina
The Miller School of Entrepreneurship and the School of Hospitality Leadership recently held a series of workshops in eastern North Carolina that focused on succession planning.
by Dr. Dennis Barber, III and Dr. Mike Harris
Small and family-owned businesses generate no less than 65% of the gross domestic product in the U.S. Family-owned businesses account for 62% of the nation’s employees and create about 78% of the new jobs annually. Firms of this size can remain resilient and flexible during economic downturns and can adapt. Due to lack of planning, many of these businesses, however, do not make it past the first generation. It is estimated that only 40% of firms make a successful transition from the first to the second generation. A successful business transition can lead to a return on the owner’s time, money and effort that was invested in the business, but before this transition, 5 – 10 years of planning would have had to take place. To undertake this type of planning puts owners in a position to face aging, the value of money, retirement gap issues. These are not subjects that owners readily confront. More than 85% of family business owners plan to pass the firm down to the next generation, but less than half have made any documented plans to do so, and nearly 60% of owners over 55 years of age have not discussion transition plans with their spouses or business partners.
Where are we now
Faculty at East Carolina University’s College of Business (COB) (both the Miller School of Entrepreneurship and the School of Hospitality Leadership) recently conducted a series of workshops in eastern North Carolina to address exit planning strategies for small and family businesses. Conversations with the attendees and feedback from participants hinted that this type of content was important and sparsely provided. This access to feedback, in turn, led to a valuable question, “Was there a gap in exit planning training for small and family businesses?” To answer this question, faculty gathered data from multiple sources (including North Carolina SBCs and SBTDCs) which provide business seminars and workshops. The four years of data compiled included over 4,000 workshops in rural North Carolina. A content analysis revealed that less than five workshops, seminars and programs addressed the topic of exit planning, transition planning or succession planning. That is less than 0.1% of all total workshops. This lack of knowledge is a major gap in the services offered to small and family businesses in the state of North Carolina. A future study will include gathering data, and it is suspected that the same findings will be accurate nationwide.
The aging population and negative population growth rates in eastern North Carolina counties, combined with a lack of exit planning could be a recipe for disaster, i.e., the downfall of small rural communities that could include loss of jobs, service companies and real estate investment. Economic development efforts are aimed to bring in more young people and to diversify the local economies. Many of the firms with aging owners offer essential services (mechanics, restaurants, trade workers) to the residents. Many businesses in the region will transition in the next 15 to 20 years. There are several approaches to transition, and there is no right way for all businesses. Owners may decide to transition the business to an internal, non-family employee, pass it on to the next generation, sell it to an external buyer, create an Employee Stock Ownership Plan or let the business dissolve. In most cases, the latter is not preferred.
Creating new training using old methods is not a quick fix for owners of small and family businesses. They have unique demands and therefore require unique solutions, such as:
- Small & family businesses can’t afford corporate-sponsored retirement plans;
- Rural areas have difficulty locating and keeping skilled, experienced and educated labor;
- Logistics can be more difficult in rural areas;
- Financial investment resources are limited; and
- Owners of small, rural businesses often operate as a sole proprietor (and contract employees), so they do not have reliable financial projection data
As noted by Khan (2016), the social practice of exit planning for small, regional and/or rural businesses is quite unattainable with traditional seminars and workshops. This practice is a distinct phenomenon with unique demands, and therefore must be treated as such with innovative ways to tackle, develop and reinforce exit planning. SBCs and SBTDCs are not positioned to help these owners meet the aforementioned unique demands. Researchers can complement these organizations to rethink and redevelop how this planning happens and when it happens for this unique group of businesses and their owners.
Looking Ahead
The COB is designing applied and sponsored research programs to better identify the service gaps and build programs with community partners to address them. One such example is RISE29, an award-winning program funded by the Golden LEAF Foundation that connects ECU students and resources with opportunities in select counties in eastern North Carolina. One of the primary goals of this program is to help small and family business owners in Beaufort, Hyde, Martin and Pitt counties with succession planning and exit strategies. This help includes student-led consulting projects with small business clients to identify potential buyers. RISE29 is designed to help with regional transformation through the creation of new microenterprises, as well as targeted assistance to existing small and family-owned businesses. Community partnerships and data analytics will help drive this program and allow ECU to become a national leader in rural entrepreneurship and business development.
Additionally, researchers in the Miller School of Entrepreneurship and the School of Hospitality Leadership in the College of Business plan to secure additional grants to conduct a qualitative analysis of the transition readiness of owners throughout rural North Carolina. The intention is to discover the areas of needs, so that programming can be tailored to address the planning gaps. The data will also be used to create a quantitative tool to measure transition readiness of small and family firms in rural areas. With the learning accumulated by the deployment of this tool, the Small Business Resource Center in the Miller School can work with community partners to directly target the transition needs of firms. A long-run objective would be to partner with other institutions to create a national model to measure transition readiness of rural owners nationwide.
In the meantime
Research, however, can take time. During this period, numerous small businesses can go under, affecting the lives of many and the communities these lives call home.
Business owners, in the meantime, can:
- speak with their attorneys and CPAs about succession planning;
- consider a business valuation; and
- investigate the multiple options for transition (sell to an outside party, pass on to a family member, sell to a key employee, employee stock ownership plan, etc.).
There’s no easy fix to help small-business owners with their business transition. However, ongoing and new research could provide new avenues and strategies that can be used.
Dennis Barber, III, is an assistant professor in the Miller School of Entrepreneurship at ECU’s College of Business. Mike Harris is the director of the Miller School of Entrepreneurship.