Published: November 10, 2005 11:03 am         

8 business succession-planning mistakes to avoid

Most business owners expect to pass on some day their pride and joy. The financial proceeds from a change in ownership will fund the owner’s retirement and may carry the owner’s creation down through the generations. Yet many small-business owners make mistakes when it comes to succession planning that can thwart their biggest dreams.

Want “Junior” to take over the family business? Avoid these 8 common mistakes:

Waiting too long to plan

Many business owners leave succession planning until the last moment. 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

Not all children want to eventually take over the family business. Perhaps your child really wants to be a schoolteacher, minister or doctor instead. Encourage them to work in the business, but don’t pressure them. It’s not fair to them, and it will probably be a disaster for the business if you try to shove them into a role they don’t want. You’ll 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 person needs to run the company. That’s why it’s 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 doesn’t want to be involved in the business, devise a way to leave the child non-business assets to keep the playing field as even as possible.

Waiting too long to give real authority to the heir

Another common mistake is to wait too long to give genuine responsibility and authority to a potential heir. Many owners never give it up until the day they retire — only to learn painfully that their child isn’t up to the task. Allow them to make decisions, and let them build the needed relationships with vendors, employees and customers. Sure, they will make some mistakes. But chances are high that you, too, made a few mistakes when starting and growing your business.

Not letting them work for another business

Sometimes encouraging an heir to work a while for someone else before committing to the family business can be valuable training and can give them a clearer sense of whether they ultimately want to run the family business.

Being secretive about your plans

Business owners frequently play their succession plans close to the chest. Perhaps they’re worried about stirring up family conflicts or they just don’t 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. It also gives you time to modify the plan, if necessary.

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 — often to the detriment of the business and family relations.

Planning alone

Business succession planning is complicated (we haven’t even discussed tax issues here) and fraught with land mines. Outside experts can be invaluable, particularly someone who can lead family meetings and ease family conflicts through their knowledgeable, objective perspective.

(Scott Logan is a fee-only certified financial planner professional and registered investment advisor. Comments or questions can be directed to Logan at 608-3099 or scott@assetplanningsolutions.net.)

     

• Click to discuss this story with other readers on our forums.