Avoid common mistakes in succession planning

Far too often, businesses fail to survive the death of the founder because of the business owner’s failure to undertake this important plan. For owners to be sure that their businesses will be viable long after they’re gone, it’s important to avoid the most common mistakes in 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 business 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 sales price or inheritance value of a business is so that plans for its purchase as the transaction relates to estate taxes can be made accordingly.

3. Failure to take the time to address who will be on the succession team. This often involves a tough analysis of whether family members 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. Failure to separate the family dynamic from the family business. If the business is a closely held business, treating it like the family rather than as a business involving family is a mistake. 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? This is important particularly if a surviving spouse is relying on the business being a going concern for income.

Like all other aspects of financial planning, failure to plan is a choice. Work with your financial advisers 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 term.

Alan Lockhart is president of Marketing Financial, a wholesaler of financial products. He can be reached at alan@marketingfinancial.com.[[In-content Ad]]