Most business owners understand the time will come when they need to pass the torch onto a successor. Moving from work life to retirement life is a big step. For a business owner, this is especially true because of the emotional investment in the company and reliance on the proceeds from the transition to fund retirement. Although the awareness of transition is present, it may be difficult to initiate the process or to overcome common mistakes and pitfalls. Since most owners go through the succession planning process once in their life, it is essential to understand common issues made in the process. To help business owners understand common issues faced in succession planning, we have provided a comprehensive summary of the top five issues we see.
Top 5 Succession Planning Mistakes
In our experience, there are a number of mistakes often made in the planning process. We have provided a summary of the most common.
- Not Creating a Planning Timeline. It is common for many business owners to delay before starting the planning process. In one sense, this is a natural emotional response since these individuals have invested a significant part of their life in the business. However, the longer an owner waits, the more difficult it may be to develop an effective plan. Identifying goals, successor candidates, proper training and transition of responsibilities may take years of planning. For this reason, it is critical to start planning as early as reasonably possible. This will ensure there is adequate time needed to accommodate each step of the process.
- No Clear Benchmarks. Even when an owner has a commitment to the process, it is essential to clearly identify benchmarks for when certain things will happen. Without clear benchmarks it is impossible to keep the plan on track or to know if the steps executed have been effective. Sometimes the process of transitioning out of the company seems so complex owners may become paralyzed with fear. The more time spent breaking progress down into small, manageable chunks, the easier it will be for the transition to happen.
- Unable to Transfer Responsibility. Once a successor is identified, it is important to have a plan gradually transferring responsibility and decision making power to the new person. However, in our experience, sometimes owners only give nominal responsibility while not giving up actual control. While this is understandable on some level, it is also damaging to the succession process. It is necessary to give the successor the freedom and decision making power so they can become comfortable in the role. It is also necessary for employees so they see the actual transition occurring. Not authentically transferring responsibility sends a confusing message to employees and the successor.
- Secretive Planning. Oftentimes a business owner will have a plan created, but make no effort to communicate the plan. This is a critical mistake with serious ramifications. Openly discussing the succession plan with key family and staff members provides much needed time for the changes to “sink in.” Beyond this open discussion about the transition and succession steps may result in new ideas for the actual transition. Waiting too long to share the plan with others reduces the time available to optimize and enhance plan effectiveness.
- Retirement Fear. In some cases, although the business owner realizes the need to transition the business, there is a deep seated fear of retirement. Since the business has consumed their attention and time for many years, it is easy to understand why they may not want to leave. For this reason, it is essential to have a post transition plan. Identifying what to do during retirement (including travel, more family time and investment in charitable endeavors) will build excitement and reduce owner attachment to the company and resistance to the process.
Succession planning is an essential and complex process requiring careful planning for the various considerations. If you are thinking about developing a succession plan for your company, then Smith Schafer wants to help. Click here to schedule a consultation.