Business Succession Planning Mistakes To Avoid
As seen in the Fort Bend CEO magazine
Most business owners expect to pass on their pride and joy one day—mostly likely to their children, but possibly to an employee or an outside buyer. This change in ownership is what will fund the owner’s retirement and carry the owner’s creation through the generations. Yet many small-business owners make mistakes when it comes to succession planning that can get in the way of their dreams. Here we discuss a few business succession planning mistakes to avoid.
Waiting too long to plan. Many business owners leave succession planning until the last moment—if they plan at all. Yet an ideal succession plan requires laying the groundwork over many years—some experts recommend planning your exit strategy from the day you start the business. How you want to exit the business tomorrow strongly influences how you structure and operate the business today.
Assuming your children will take over the business. While many children want to eventually take over the family business, not all do. It is critical to talk to them about what they envision for themselves. Encourage them to work in the business, but do not pressure them. It is not fair to them, and it will probably be a disaster for the business if you try to shove them into a role they do not really want. You will want to know their desires as soon as practical in order to pursue other avenues if necessary, such as selling to a valued employee or outside buyer.
Dividing the business equally among heirs. Equal partnership among heirs is usually a recipe for disaster because of inevitable conflicts, different skills and different visions. Ultimately, one child needs to run the company. That is why it is critical to plan well in advance, to see who among your children has the talent and genuine desire to run your business. And if a child does not want to be involved in the business, devise a way to leave the child non-business assets such as insurance, or perhaps nonvoting shares in the business (though this, too, can lead to conflicts).
Being secretive about your plans. Business owners frequently play their succession plans close to the chest. Perhaps they are worried about stirring up family conflicts or they just do not like to talk about the family money. This is a disservice to your heirs and potentially a disaster for the business. The sooner you can inform them how you see your succession plan, the sooner they can make their own plans.
Not thinking of your retirement years. Retirement can be difficult for small-business owners because often their business is the all-consuming center of their life, even their personal identity. Without a clear sense of what they want to do in retirement, they inevitably drift back to the family business, frequently meddling in how it’s currently being run.
Planning alone. Business succession planning is complicated (we have not even discussed tax issues here) and fraught with landmines. Outside experts can be invaluable, particularly someone who can lead family meetings and ease family conflicts through their knowledgeable, objective perspective.
WJ Interests, LLC, has provided Fee-Only financial advice to individuals, families and businesses since 1996. For more information, please contact us at email@example.com or 281-634-9400.