Nine Common Mistakes In Business Succession Planning

Business succession planning is one of the most important—and most overlooked—tasks that a business owner should incorporate into creating his or her business plan.

Business succession planning is one of the most important—and most overlooked—tasks that a business owner should incorporate into creating his or her business plan. One CPA that I work with will advise his clients to have an exit strategy in mind from the outset. Far too often, businesses fail to survive the death of the founder because of the business owner's failure to undertake this important plan. Business succession planning can involve some complex issues. It takes forethought and planning to ensure that the business owner has the processes in place by which the business can continue to operate after the owner steps down, dies or becomes disabled.

Unfortunately, according to the Goering Center for Family and Private Business, 65 percent of family businesses don't survive being passed to the second generation, and 85 percent of family business don't survive to the third generation. One reason for these low numbers is that 38 percent of privately held business owners have not considered how they will leave their businesses (Memphis Business Journal, January 18, 2002). To ensure that your business survives, you must avoid the most common mistakes of business succession planning:

  1. Failure to plan, also known as procrastination. Most business owners feel that there is plenty of time to deal with what will happen to their businesses after retirement or death. They are usually wrong.
  2. Failure to obtain the proper valuation of the business. Because your business succession plan will likely involve selling the business or passing it to your heirs, it is important to know what the appropriate sale price or inheritance value of a business is so that plans for its purchase or paying estate taxes can be made accordingly. When it comes to valuing your business for gifting or family succession planning purposes, it is important to hire a professional valuation expert. Some of the different certifications a professional might have include ABV or CVA.
  3. Failure to take the time to address who will be on the succession team. This often involves a tough analysis of whether family member have the skill set to run the business or whether your key succession candidates are non-family members who have been working for the business.
  4. Failure to integrate your business succession plan into your estate plan. Many small business owners think that they can simply leave the business to their spouse or heirs when, in fact, the business comprises virtually all of their net worth. By leaving the business to one person, you’ve excluded all other heirs from inheritance.
  5. Failure to plan for disability. Because disability for an extended period of time can have an adverse impact on the business, it is important to incorporate disability planning and insurance into your business succession plan.
  6. Failure to identify key employees who may have concerns with your succession plan. It is important to ensure that those key employees remain with the business during any succession transfer.
  7. If the business is a closely held business, treating it like the family rather than as a business involving family. It’s important when the business is closely held in the family to separate the family dynamic from the business dynamic as much as possible and to recognize that these different dynamics are at work.
  8. Failure to diversify the business owner’s net worth from the business as a whole. Many business owners hold virtually all of their net worth in their business and find themselves in a difficult situation in a business downturn. After they are gone, their heirs may be forced to sell the business when the market for it is poor.
  9. Failure to plan for contingencies. If you’ve decided to leave your business to an adult child, what will happen if that adult child predeceases you? Do you have a contingent buyer available (particularly if your surviving spouse was relying on the business being an ongoing concern for his or her income)?

Like all other aspects of financial planning, failure to plan is a plan in and of itself. If you do not like the outcome of your current plan, only you can change it. Work with your financial advisors to avoid these common mistakes by beginning the planning process now. A good succession plan can always be modified as situations change, and failing to commit to a lifelong strategy should not prevent you from putting a succession plan in place that will operate for the near future.

This article is reprinted with permission from The Family Business Report sponsored by the Goering Center at the University of Cincinnati College of Business Administration.