Last updated on May 13th, 2019 at 02:29 pm
Most business owners understand the importance of strategic planning for their businesses. However, many fail to also establish a business succession plan, or if they do, they make common mistakes.
Succession planning is necessary for any business to continue to function after the death or retirement of the owner. A well-crafted succession plan can help avoid tax penalties, the possibility of an undesired owner taking over the business, and family discord – allowing business operations to continue smoothly into the future.
Here are the 10 mistakes most commonly made by small-business owners when establishing their succession plan. Any of these errors can hinder the owner’s ability to transfer the business to the next generation in the event of their death or retirement.
1) Failure to maintain ownership records. To be able to prove you actually own your business, it is necessary to maintain an updated stock register. Your attorney will generally keep these records for you if you provide the proper information.
2) Not knowing the value of your business. It is possible that selling the business will be the best option for your family. You may have no obvious heirs, or they may not be interested in owning your business. The sales process is much easier if you know what your business is worth and how a buyer would value it.
3) Not taking advantage of available discounts. A discount is a reduction in the value of the stock taken (for tax purposes) when transferring the business by lifetime gifts, or at the business owner’s death. There are two types of discounts. The first is a minority interest discount, which is taken when the amount of stock transferred does not allow the new owner to control the company. The second is a lack of marketability discount. This discount is taken when a buyer for the company cannot be easily found. (This is usually assumed with small businesses.)
4) Financing the succession plan through the business. Work closely with your banker to determine how much money can come from the business for the stock purchase. You don’t want to bankrupt your business. The stock purchase may need to be financed with buyer cash or a seller note.
5) Letting the ownership stray. You might be content to give or sell all or part of your business to family members, but what happens if there is a divorce, or one of your heirs dies? A proper succession plan includes a trust or buy-sell agreement to keep undesired owners from taking over or becoming part of the business.
6) Failing to train your successors. Many high-level executives prefer not to have strong successors waiting in the wings to replace them. However, having a clearly defined successor will help you to retain your top talent and will let everyone at your business know what opportunities exist for career advancement. It is especially important to be sure your children have received adequate training if you plan for them to succeed you. Many small-business owners do not have an objective opinion on the readiness of their children to succeed them.
7) Not consulting advisors who specialize in family businesses. It is not necessary for you to abandon your current attorney, banker or CPA but you should develop a relationship with at least one professional who understands the special needs of family businesses. This will give you someone you can turn to in times of crisis.
8) Improperly allocating your assets. Many business owners provide all of their children, whether they are active in the business or not, with ownership interest. This can lead to squabbles between the active and the inactive siblings and tear both the business and the family apart. A better solution is to leave assets other than the business to siblings who are not active in the business and leave most of the business stock to the children running the company.
9) Stopping the planning process before the plan is finished. Your children may not be interested in running your business, or might have different ideas about which sibling should function in a particular capacity. An unrelated co-owner may want to purchase the shares you want to give to your family. There are many emotionally charged issues that must be handled during the succession planning process, and many business owners lack the strength to overcome them. Hire an outside professional who can help you work through disagreements and provide an objective opinion.
10) Not planning at all. Business owners fail to establish their succession plans for the same reasons other people fail to write their wills: the end of their careers and their death are uncomfortable subjects. It is important to remind yourself that if you truly want your years of hard work to benefit your family after your death or retirement, you must plan properly for these events.
If your business does not have a succession plan, now is the time to act. A succession plan can help your business survive an unforeseen tragedy and facilitate a seamless transition of ownership from one generation to the next.
Although every business owner is unique, many of the succession concerns small-business owners face are the same. By enlisting the help of an experienced professional and starting the process early, you can insulate your family from potential problems. After all, you never know what tomorrow will bring.
Paul Senger, CPA, CVA, is a shareholder with the accounting firm of Winter, Kloman, Moter & Repp S.C., which has offices in Elm Grove and Oconomowoc. He can be reached at (262) 797-9050 or at email@example.com.