Even the strongest business can be decimated without a solid succession plan. Here’s how to avoid common pitfalls
As with any part of business strategy, succession planning is one piece to the puzzle for companies to have a long life. And it’s not a small consideration. Succession planning can drive continued business growth, lead to a smooth transition after retirement, and even reduce taxes.
But according to a Deloitte report, only 30% of family-owned businesses make it into the second generation, 12% into the third, and 3% into the fourth and beyond. These statistics don’t count the organizations that failed shortly after an owner sold them—often with financial repercussions to the seller.
Succession plans fail for a variety of reasons, but some of the most common are:
- Leaving roles undefined
- Failing to recognize internal talent
- Not focusing on how the transition itself will work
- Not planning for a business of the future and likely structural changes
Let’s dig into how to avoid some of these pitfalls:
Clearly define roles
Succession planning is more than just focusing on who will replace the primary business leader. In fact, it should involve all parts of the business. Just as important as naming your successor is figuring out how that change will impact other leaders and managers. You must recognize that succession planning is integral to the entire business strategy.
All units of the business should have a part in the succession plan. Instead of only focusing on who will replace the CEO, also outline who will be succeeding each department head or manager, even if these moments don’t all occur at once. Beyond managers and supervisors, detail which roles within the business are integral to success and include them in the plan.
Clearly define each key role and what specific responsibilities that person will have. Namely, what they’ll be held accountable for, who will report to them, who they will report to, and their role in critical business processes.
In addition to defining crucial roles, identifying who will fill these roles is also an area where many executives fail. Finding the best candidates won’t happen overnight, but many business owners may not put as much emphasis on current team members as they should.
Pay close attention to internal employees and leaders who show promise. This requires looking at team- and employee-specific KPIs and actual performance results over some time. A management talent assessment should be conducted when you are succession planning so that the company’s next generation will be strong.
Focus on the transition
Make sure that the transitional period is prioritized when planning, not just the eventual outcomes of the shift. This may even require hiring or appointing a pivotal person to lead the transition. They can be involved in succession planning now to understand goals and how to implement the plan when the time comes.
The transition doesn’t have to be instant, so focus on the concrete steps that will be taken when you’re ready to step down. One important step is communication with stakeholders. As Deloitte points out in the report above, failure to communicate with this group is “one of the biggest threats to a smooth transition of a business from one generation to the next.”
Incorporate the needs and concerns of other stakeholders during the planning process so they’ll be more aware of and involved in the transition when it’s occurring. They’ll feel like they have a say in the process, and their help and support during the transition are vital.
Consider tax implications
Estate and tax planning can go hand-in-hand with succession planning, especially if a priority is preserving family wealth generated from the business. This requires knowledge about the best approaches to reducing taxes when you’re transferring ownership of the company, which can be easy to overlook for many founders.
Make sure that the current business entity structure makes the most sense for long-term success. The type of structure you choose can impact both business and personal taxation. And how much the company is worth will affect gift and estate taxes, so succession planning should prioritize effectively valuing the organization.
One important step is identifying what exactly makes the business valuable. In succession planning, preserving both assets and values should be top of mind, so the entity will continue that legacy and continue to grow. Passing down a company only to have its values changed or forgotten can easily happen when leadership changes hands.
Just as important as outlining key roles and figuring out successors is 1) defining the current operating structure and 2) thinking through how crucial business functions may change in the future.
What about operations could shift? What will look different as the business becomes larger? What will change about the community the company serves? You won’t know how to identify roles and responsibilities until you can get a clear picture of where the organization is headed.
Effective succession planning will lead to many benefits for both you and the business you’ve worked hard to build. These include:
- Long-term survival and growth
- Agreement among stakeholders, employees, family members, and heirs
- Taking control of the process now so that it’s not out of your hands when the time comes
- A smoother transition for everyone across the organization
- Confidence that you’re leaving your business to the right people who share your values
- Reduced estate and income taxes
There’s no avoiding the fact that you’ll be exiting from your business someday. Creating a sound succession plan will ensure an exit goes smoothly and achieves your goals.
Contact Provident CPA & Business Advisors to learn more about our advisory services.