5 Common Succession Planning Problems

Mar 1, 2022Business, Business Valuation, Estate & Retirement Planning

Avoid these succession planning issues

Succession is inevitable in a business. When it comes to thinking about retiring or transferring ownership, it is essential to understand common issues related to the process. When a closely-held business owner is asked about their succession plan, it is often a topic that receives little thought due to the amount of time consumed with day-to-day operations. Every business owner has an emotional and financial investment in their company and often relies on the proceeds from their investment to fund retirement. The earlier an owner can design a succession plan in their career, the smoother it will make the transition and maximize the financial rewards. To help business owners understand the common issues faced in succession planning, our experts have provided a comprehensive summary of the common succession planning problems below.
 

1. MIXED EMOTIONS

For most business owners, it can be hard to set a day to retire. It makes it even harder when the person’s current position is owning and operating a business they have built from the ground up. A significant reason to create a succession plan is to circumvent mixed emotions during the succession. 

Uncertainty by the owner raises the chance for risk in the succession process. The owner may be hesitant to develop a plan because it outlines the inevitable end to their role in a business. To eliminate fear and indecision later in the process, it is crucial to focus on developing a plan in a timely manner. 

2. TIMING

Developing a timeline could be the most significant problem a business owner may have when approaching succession planning. Preparing a business’s succession plan forces the owner to think about their mortality and even business competency as they progress in life. It may be an uncomfortable conversation to have, but it will be vital in determining a company’s livelihood when resignation, death, retirement, or disability occurs. 

Recommendation: Become active in developing a succession plan. Think of the alternative, where there is nothing in place at all. If something happens to the owner or another key person, the business structure is open to dissolution very quickly. Succession planning becomes a device to mitigate risk and provide a foundation for the future. 

3. IDENTIFYING A SUCCESSOR 

When thinking about a successor, not every business owner is fortunate enough to have a competent son or daughter that can easily fill a management role. If that option is not the case, here are steps to take when searching for a successor:  

  • Identify characteristics & skills – Many business owners try to look for a “me-type” of owner. This person often shares many qualities similar to that of the current owner. It is important to think of the characteristics and skills of a person as a whole. Find qualities that make a owner successful. This person may be different in many ways, but contains appropriate abilities to help continue business success. 
  • Promote from within – A successful business is rarely ran by one individual alone. Identify standouts in management and throughout the business that may have an interest in expanding their role in the business. There is a great benefit to having someone take over who understands how the business operates, the company’s culture and its keys to success. 
  • Transferring responsibilities – Once a successor is identified, it is essential to have a succession plan transferring different roles and decision making power. However, in our experience, owners tend to pass on certain responsibilities, while not giving up actual control. It is beneficial to adhere with the succession plan set in place and allow for a successor it flourish in their role.

4. SUCCESSION PLAN DESIGN

Like any good business plan or budget, it is important to be realistic and set attainable expectations. Start by developing goals. These goals should create value for the business. Ensure every part of the succession plan lends itself to this goal. 

Identify benchmarks or a timeline for when things will occur. In many cases, this will be associated with the age the owner expects to retire. Without clear benchmarks, it is hard to know if a plan is on track or being executed effectively. Confirming the plan is being performed piece by piece will make the transition easier.

Communicate the plan with management, family members, or advisors. This makes it easier for an owner to be accountable for each step. An outside view of a succession plan may lend additional opinions and help ensure the plan is realistic.

Lastly, be active in the transition. When employees, management, or family members see an owner pass on specific responsibilities or control in the business, it lets others know the succession plan is being taken seriously.  

Once succession planning is finished, it must be updated every few years. Changes in employees, industry or market conditions all contribute to planning revisions. Even if there are no significant changes, there may still be improvements every time the succession plan is revisited. 

5. VALUATION

Part of developing a succession plan may be acquiring a business valuation. If the actual succession is not for several years, some may think there is no value in obtaining a valuation. Realistically, it may be challenging to make decisions regarding the succession plan without understanding the business’s current value. The value of a company does change over time, but a business valuation provides a benchmark for planning purposes. Having a business professionally valued creates a reliable number that can be communicated to potential buyers.

Questions on how you can best avoid Succession Planning Problems?

Smith Schafer works with business owners in multiple industries to uncover the actual value of their companies’ tangible and intangible assets. Whether you need help creating a succession plan or conducting a business valuation, our professionals can guide you. Click to contact Smith Schafer’s Valuation Services Group to schedule a consultation. We look forward to speaking with you!

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