Business Succession Pitfalls to Avoid
Many owners do not realize that a succession plan is more than simply naming a new boss; it offers a road map for moving the company forward in such a way that protects its value and profitability. It also lays the foundation for growth and stability.
Creating a well-designed succession plan can be challenging but will go more smoothly by avoiding the following common pitfalls:
1. Assuming your child/children share your passion in the business. Most people love the idea of a legacy, especially where their children are involved. But before turning the keys to the kingdom over, owners need to be aware of how their offspring really feel and that means starting the conversation years before you ever consider stepping down. Not all children will want to follow in the family business and they need the freedom to say so. And those who do may be better suited for CFO or CTO rather than CEO. The best legacy is making decisions that will give the company the best chance to sustain its success, value, and profitability even if that ultimately means your successor is a non-relative.
2. Treating your children equally. As a parent you love all your children equally and unconditionally, but as a business owner it is imperative you identify the strengths, weaknesses, and personal passions of your potential successors. Trying to treat children equally when it comes to choosing a successor will only hurt the business, which in the end will hurt all your children. Management and the ultimate control of your company cannot be divided equally. But while there can only be one chief executive, other children interested in working at the family business can prosper in other important positions that better reflect their professional interests and strengths.
3. Lack of preparation. Most owners have spent a majority of their professional lives learning how to effectively run their company and it becomes second nature. They forget how much knowledge they carry around in their heads, so a common pitfall is failing to properly groom their successor. Realistically, it can take years to enable someone to hit the ground running when they take over. A succession plan needs to be developed sooner rather than later so your successor will have the tools, knowledge, and experience to succeed and the time to form important relationships and earn the trust of both employees and management.
4. Undue financial expectations. In cases where a successor buys the company, it is rare for the original owner to get full payment when they retire. More typical is a down payment after which the owner gets monthly or yearly payouts. There needs to be a balance between the payouts, which presumably the owner will live on in retirement, and maintaining enough cash flow and working capital so the business can grow and thrive. Expecting a large payout up-front could over-leverage the company. One option is to own the company’s real estate separately so that the owner can continue taking rent from the business. But the safest option is to build adequate resources that are completely separated from the operation of the family business.
5. Secrecy. Especially in the case of family, owners will often not communicate their thoughts about succession—mostly out of fear it may cause family tension or in-fighting. But keeping things too close to the vest is a recipe for family conflict, which in turn can negatively impact the company. Honesty, transparency, and openness among family members and seeking their input into your plans is the most effective way of keeping the business healthy and keeping the family happy.
6. Lack of a strong management team. Whoever takes over from the owner will need an effective, knowledgeable, and supportive management team. Building depth by developing people from within the company will give the successor an invaluable support system. It’s a point worth repeating; succession planning is not just about finding a new CEO but about every significant leadership role that exists in your business.
We help business owners avoid common pitfalls that can derail a succession plan and assist you in devising a plan that ensures your company will remain profitable and strong for generations to come.
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