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Succession Planning For Your Suppliers, Contractors And Manufacturers’ Reps

Bill Conerly

Small business owners are retiring in greater numbers as the Baby Boom generation ages. We wish them a happy retirement, but small and medium businesses use other small businesses for vital goods and services. Many companies have made succession plans for their owners and top managers, but what about critical non-employees? For example, a manufacturer may use independent sales representatives. A timber company may use contract loggers. A health clinic may outsource its human resources function to a small, local firm. And businesses across all industries use accountants, lawyers and IT consultants.

Let’s call all of these other companies partner businesses, though they are not partners in a co-ownership sense. Some partners will be easy to replace, others more difficult. Smooth transitions require some forethought. The “silver tsunami” of retirements will certainly bring challenges for continuing businesses, but may also bring opportunities for greater sales and reduced costs.

The number of 65-year-olds is hugely larger now than a decade ago, 3.8 million versus 2.7 million. Age 65 is not a magic number, as some retire earlier and some later. The aging of small business owners is a fact, though, and they will eventually leave their businesses. Demographic data indicate that the rapid departures will continue through 2030.

Large companies that provide goods or services to small businesses are usually less of a problem, as they have layers of management. Executives at a large corporation that provides telephone service, for example, will ensure that retirement of a local manager does not disrupt operations. Some medium sized companies also have good internal succession plans in place. Those plans may involve the next generation of family ownership or an experienced 50-year-old ready to step into the retiring owner’s shoes.

Small businesses present greater succession challenges. In many cases, the owner’s children are not interested in the business. In some cases, the next generation may not be competent. Companies without a competent next generation to take over would benefit from good managers who can run the business, but many small companies lack the management ranks to have a good reserve of talent.

A company that relies on partner businesses should begin by assessing its key relationships. A simple way to think through the list is to start with sales, thinking about sales reps, marketing consultants and advertising suppliers. Close to sales is customer service and delivery. Prior to that is operations. Before that is purchasing. All along the path are information technology, accounting, as well as human resources and legal advice.

For each relationship, the company should assess the availability of alternatives. Unless the company is located in a very small town, there will be abundant choices of accountants, lawyers and general IT consultants. A great accountant’s retirement may be unfortunate, but it won’t be disastrous. However, the more specialized and unusual the business partner, the harder it will be to find a replacement. A contract manufacturer supplying unusual, custom-designed parts may be a challenge to replace. A sales rep who knows HVAC contractors in Anchorage and who does not represent any competitors could be difficult to find.

In most cases, the list of at-risk partners will be fairly short. The first step is to start a conversation, according to Charles Cohon, the CEO of Manufacturers’ Agents National Association and a former manufacturers’ rep himself. He notes that some reps may feel nervous about the subject, fearing that the conversation might be a signal that the company plans to sever the relationship. Business continuity is a concept that most reps will understand, however, and the company’s commitment to the relationship will go a long way to helping the conversations progress over time.

The conversation is a vital step not just for manufacturers’ reps but for any critical business alliance. In fact, succession planning for sudden illness or death, as well as retirement, will enhance the both companies’ resilience over time. And with a broader scope of conversation, the subject can be part of an annual review of the relationship even when the agent is years away from retirement. The rep who has spoken about succession to the principal every year since age 50 will not be alarmed when the subject comes up at age 65.

The specific conversation can involve asking partners how long until they retire? What plans do they have for succession? Will they sell to one of their current employees, to another company, or just close up shop? Cohon reports that succession planning is a common topic at meetings of manufacturers’ reps. It is likely, though, that some are putting off their thinking about succession planning, just as so many of us put off estate planning.

Opportunities may exist with some of the business partners. A company can take a fresh look at the contracting-out decision. For example, the choice between a company sales office and an independent agent is best made in a calm mood, not in the panic that comes from missing Wall Street earnings forecasts. Similarly with other outsourced relationships, such as IT services, decisions should be made with a long-term view of business strategy.

A business that provides services to others may also find an opportunity in competitors’ retirements. Companies without a good succession plan might be purchased at attractive prices, often with seller financing, enabling younger business owners to expand their operations. One person’s problem can be another’s opportunity.

The wave of small business owner retirements will be a significant challenge for years to come. Planning for the transition of critical business partners is as important as planning for a company’s own employees.

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