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As a small business owner, you probably feel that your business is your baby. You may find it hard to think about what will happen to it when you are no longer able to run it. Nevertheless, if you want your business to continue after you leave it or you want to make sure you or your heirs get top dollar for it, now is the time to start thinking about a succession plan.
Here are the top dozen mistakes that people make when creating a business succession plan—and how you can avoid them.
1. NOT PLANNING SOON ENOUGH
Some business owners put off thinking about succession until a serious illness or desire to retire forces the issue. They rush through the process of selling or transferring the business because they want or need to get out of the business quickly. Some owners die before putting a plan in place creating chaos at the business and conflict among family members and other potential successors. Other owners become incapacitated and expensive guardianship proceedings are necessary to determine how the business should be handled.
Begin planning for the end of your business when that day is still far away. A good succession plan requires you to lay a framework for the day when business ownership and management will be transferred. Knowing how your business will be handled during its next phase can help you decide how to manage it today. You may have many options to consider for transitioning ownership of your business, such as:
• Passing ownership and management of the business to one or more of your
children or other family members.
• Passing ownership of the business to family members while having outside management.
• Selling your share of the business to the remaining business owners.
• Selling the business to a neutral third party.
• Selling the business to one or more of your employees.
• Liquidating the business and selling its assets.
2. CHOOSING THE WRONG SUCCESSOR
Many business owners want to pass their businesses to their children or other close family members. Keeping the business in the family can be a gratifying solution provided the next generation is willing and capable. However, sometimes passing the business to the family is not realistic:
• The children or other relatives may not be interested in running the family business.
• The children or other relatives may lack the proper skill set to take on the management role.
• The business owner may not be able to fund retirement if he or she simply passes the business to family—rather than selling it.
Carefully consider who should take over your business. What characteristics would make your successor a good fit? Will he follow in your footsteps and manage the business according to your ethical standards? Will her connection to social media and advanced technology open your business to new opportunities? Will your successor be able to maintain relationships that have been important to your business as well as effectively market to attract new customers or clients?
Will having a partial ownership interest motivate an employee to perform better while you are still in charge?
3. CONFUSING OWNERSHIP AND LEADERSHIP
You may want your business to continue supporting your spouse and children after your passing or retirement. To accomplish this goal, you can leave the business to family, but you do not have to pass the management role to your loved ones. You can separate who will own the business from who will manage it.
4. NOT HAVING AN OBJECTIVE FRAMEWORK TO CONSIDER SUCCESSORS
Many business owners make the mistake of choosing favorites as their successors, rather than objectively considering what is best for the business and which individuals will best help the business grow. This approach can cause discord in the workplace and may disincentivize workers from fully committing to their roles within the company. It can also cause business owners to overlook qualified candidates or to place unqualified candidates in key positions.
When choosing a successor, evaluate performance reviews, personality profiles, competency assessments, and other historic data that reveal each candidate’s strengths and weaknesses. Make sure that the evaluation process makes sense within the framework of your business and considers unique details about your business.
Think about each key role in your business and which people inside or outside the business may be able to fulfill the role. Consider the characteristics that would make a person successful in each role and make your decisions about the future of your business by keeping the skills and capabilities needed at the forefront of your mind.
You also need to consider the potential impact that your decision will have on employees and other business partners. This is particularly important in the context of family businesses. Handing the business over to one child while leaving the other with no meaningful role could create conflict.
If you are having trouble making decisions about successors, an outside consultant can provide you with an objective opinion about the future leadership of your business.
5. RELYING ON ONLY ONE CANDIDATE AS YOUR SUCCESSOR
Do not limit your consideration of successors for the primary leadership role within your company to one person. Unexpected events can knock this person out of the running such as a disability, early departure from the organization, or a difference in opinion about the company’s future. Instead, try to identify a pool of well-qualified candidates from which you can select. Inform your candidates about advancement potential and provide them with training opportunities. This proactive planning will allow you to fill vacancies within your organization as they arise.
6. NOT ADOPTING A FORMAL STRATEGY
Too many business owners rely on informal arrangements; they simply talk to others about vague plans once they retire. For a succession plan to be successful, a formal strategy must be put in place. Your formal strategy should align with the strategic goals of your business and include information such as:
• The identification of the key roles within your organization.
• Job descriptions and the skillsets necessary for these roles.
• Objective criteria and a continuous performance management strategy to assess potential candidates.
7. KEEPING YOUR PLANS SECRET
Keeping the details of the succession plan secret can lead to significant conflict. Estate planning disputes often arise because of failure to communicate, misunderstandings, and incorrect assumptions. The same is true for business
Family business owners may be afraid of being honest about their succession plans because they are worried about causing family discord. They may not be prepared to talk to family members about money.
For businesses that will not be transferred within the family, conflict may still arise when employees feel that they were misled or kept in the dark. Employees who were slated to be part of the next generation of leadership may leave the company because they were never informed of the opportunity for advancement. When business owners do not make their succession plans public, other owners or directors of the company may be under the mistaken belief that there is no plan. They may feel insecure and leave the business for other, more secure opportunities.
Transparency about your succession plans accomplishes several objectives. It instills employee trust in the company. It enables employees to know what is expected of them to advance to leadership positions. It motivates potential future leaders to achieve desired performance metrics and to commit to the business. It minimizes the risk of conflict because you can explain your plans while you are still with the business.
8. MAKING SUCCESSION A COMPETITION
While employees should be motivated to work their way up in the company, do not make succession feel like a competition. You do not want employees to feel pressure to minimize the contributions of others within the organization. This can breed a negative business environment that is destructive and threatening to your business’ future.
9. NOT CONSIDERING TAX CONSEQUENCES
If a business owner sells or transfers ownership of the business, there may be tax consequences. Your business may be worth enough to subject your estate to estate taxes. If the value of your estate exceeds the estate tax exemption in effect for the year of your death, estate taxes may claim a significant percentage of your taxable estate. To pay the taxes, your estate may need to liquidate business assets or your business may be burdened with significant debt to pay the taxes. Other potential taxes may include gift tax, income tax, and capital gains taxes. All of these tax consequences should be considered when determining the succession of your business. An estate planning lawyer can work with you to devise a plan that minimizes the impact of taxes on your business.
10. OVER OR UNDERVALUING THE BUSINESS
Some business owners have an inflated sense of their business’s value. While you may feel your business is priceless, you must quantify its value as part of your succession planning. A firm understanding of the value of your business should inform your decision to sell the business, transfer it, keep a portion of it through your retirement, or make other plans for your succession.
When you establish your business, consider a methodology for valuing the business. If your business has co-owners, you can incorporate the valuation methodology into your buy-sell agreement. This will make it easier for you to value the business when the time comes because you already have a pre-approved evaluation process.
One objective way to value your business is to hire a business appraiser who can evaluate your financial documents, business goodwill, and historic data to provide an estimate of what your business is worth. This documentation will give you a clear sense of your business’s value and provide you with objective support if you decide to sell the business.
11. NOT FACING REALITY
Some business owners refuse to admit that they are mortal and business succession will happen. Your death or retirement is inevitable, so you must consider your succession when it is a far thought in the distance. It is better to be proactive about your succession instead of waiting for disaster to strike and having to react to it.
Accept that you may need help with the business succession process. Do not try to complete this process alone; the stakes are too high. A qualified business successionplanning lawyer can help you identify your options, anticipate possible issues, and develop a solid plan that provides clear leadership now and in the future.
12. FAILING TO UPDATE YOUR PLAN REGULARLY
One major mistake that people make with business succession planning is to consider it a one-and-done process. It is not. You should regularly review your succession plan. Consider modifying your plan if significant changes occur, such as:
• Key team members leave the company.
• An employee or family member has undergone professional development that makes them uniquely qualified for a leadership role.
• The scope of your business has changed.
• You take on new business partners.
• The value of your business has changed.
• You got married or divorced.
An estate planning lawyer can work with you as you develop an initial succession plan. As circumstances change, your lawyer can assist you in revising your plan to keep your business on the path to a successful transition.