How to Avoid Sinking Your Succession Plan

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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. 

Accommodate change

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.

The 5 Steps to Financial Freedom

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It’s crucial to be equally strong in 5 key areas to maximize financial efficiency and ensure continued growth

Ensuring the financial health of your business relies on the diligent review and management of a combination of factors, not just one or two areas. This involves carefully evaluating where you’ve been and what your numbers look like right now. Only then can you make fact-based decisions about the future of your business. 

Minimizing your tax burden and choosing the right legal business structure are two other ways to be proactive about managing your finances. You must put practices in place that give you the right insights and the power to turn those insights into action.

Here are five steps to financial freedom that we practice at Provident CPA & Business Advisors, and how we approach each area.

 1. The Proactive Management System

First, you won’t be able to plan for where you’re going without knowing where you’ve been and what’s happening right now within your business. This is why we employ the Proactive Management System to focus on two main components:

  • Accounting: We make sure that your accounting process is effective and efficient. You need a method in place that will always be accurate and also provide the insights you need to keep improving.
  • Putting numbers to work: We help you take the critical numbers you’re tracking and combine reports into a simple, automated dashboard. This enables you to always see and use your most important financial metrics.

Our system helps you understand your cash flow, identify areas where you could make changes, and take the right steps to keep growing and improving.

 2. Tax minimization

Many individuals and businesses overpay in taxes each year without knowing it. We help our clients pay the least amount of tax legally possible through a concerted review of your situation and devising a strategy that matches it. Our 5 Star Program™ helps you create a long-term plan for tax minimization that enables growth.

Examples of tax-saving strategies include taking advantage of the gift-tax exclusion, understanding and applying deductions for entertainment and travel, the tax benefits of charitable giving, and many others.

It’s also important to know the tax implications of the different types of business structures, whether you want to form an LLC, a sole proprietorship, a partnership, or a corporation. Each has its own pros and cons for taxes, and we’ll help you select the option that fits your needs and goals.

 3. Growth and profit improvement

At Provident, we’ve come up with a structure to help you scale and financially succeed. Our plan revolves around these components:

  • KPIs: Identifying the most critical key performance indicators (KPIs) for your business is the first step to success. Monitor your progress and view business data that will help you make better decisions.
  • Critical drivers: What are the vital drivers of your business? There are between three and five essential components that we’ll help you identify and measure.
  • Budgets: Keeping a rolling 12-month budget helps you understand what’s happening each month and where you can improve.
  • Forecasting: The budget is linked to 12-month forecasts so you can keep tabs on revenue and plan more effectively.
  • Financial statement review: We review and analyze all financial transactions, so nothing is unclear.
  • Cashflow planning: Prioritize real-time planning by focusing on your future cash flow.

These are all important areas that need to be reviewed regularly for continuous business improvement.

 4. Succession planning

Part of ensuring your business lasts for the long term involves creating the right succession plan. It’s not always easy to imagine how things will operate after you’re gone. But you likely don’t want the business to fail when you’re no longer running things—especially if you’re keeping it in the family, or a successful sale is tied to its continued financial performance for an agreed period. 

Start succession planning now. Key considerations when creating your succession plan include what individual will take over, the precise steps taken during the transition, and what to do if something changes. Other related strategies we help you with include selling the business, estate planning, minimizing taxes at the time of death, retirement planning, and buy/sell agreements.

 5. The EOS Model

The Entrepreneurial Operating System (EOS) is an effective method we use to help our clients. The model is centered around the idea that if you can clarify and achieve your business’s vision—and implement concerted steps along the way—you’ll find long-term success. 

There are six components of EOS:

  1. Vision: Everyone involved with the business should be on the same page about what they’re working toward.
  2. People: Every individual on your team must align with the vision and strengthen the organization.
  3. Data: Identify and track the numbers that provide an objective measure of success.
  4. Issues: Problem-solving in the right way is a crucial component of a well-run business.
  5. Processes: Identify the core processes that truly drive your business. Each department and each team member should know what to do, and these procedures should be transferrable and repeatable.
  6. Traction: Continuous growth is driven by discipline and accountability. Ensure you maintain traction by mastering the art of execution.

5 steps to financial freedom—exponential results

These five steps drive our values and services at Provident CPA & Business Advisor. We ensure that you aren’t leaving money on the table come tax time and continuously taking proactive steps to understand and improve your business.

Contact us to learn more about how we can help.