How to Avoid Sinking Your Succession Plan

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.

Exiting Your Business? Why You Need the Right Business Advisor

Most business owners aren’t prepared to sell or leave their businesses, but the right business advisor can help fill in the gaps

So, you’ve decided to sell your business. Whether you’re planning to finally retire, start a brand-new venture, or pursue something else entirely, the decision to sell is arguably one of the biggest decisions you’ll ever make. As such, it requires a thoughtful exit strategy.

As you may have already realized, exiting your business is a multi-step process that requires careful planning. There are many moving parts to consider, including drawing up the paperwork, selecting the right successor, and selling your business tax-efficiently. You can go about it on your own, but working with a business advisor can smooth the process, provide needed direction, and give you the peace of mind that you’re making the most of your sale.

How an advisor can help you

If you’ve never worked with a business advisor, you might be wondering how they can help you. An advisor’s role can vary depending on the company’s growth stage and unique goals, but during the exit planning process, the advisor acts as the “quarterback” of your team. They help you make the tough calls as you determine when to make your exit and what the contingencies are if your initial plan doesn’t happen.

Here are a couple of specific ways an advisor can aid you before your exit:

Developing a continuity/succession plan. Many business owners plan on leaving their legacy to a qualified successor within their organization. This person might be a business partner, family member, or trusted team member.

According to a 2018 report, however, 58 percent of small business owners have no succession plan. An advisor can help you draft an exit strategy that addresses the buy/sell agreements of your business, as well as create a solid succession plan that covers how you will mentor your successor before you leave. Ironing out these details in a documented form will allow everyone involved in your company, including its pending owner, to have a clear understanding of their role in the transition.

Retirement preparation. Have you thought about how you will live once you exit your business? An advisor can help you plan for retirement by assessing your business’s finances and making personalized recommendations. The sooner you start working with an advisor, the more time you have to reach your exit funding goal.

What to look for in an advisor

If you’ve never worked with a business advisor, the thought of allowing someone you don’t know to help you coordinate such an important decision can be daunting. This hesitation is understandable, especially since there are plenty of “advisors” who don’t get into details nor always work in the best interests of their clients. Rather than guide them carefully through the process, they rush owners into making hasty—and sometimes regret-filled—decisions.

When choosing an advisor, consider the following factors.

Experience. You want to work with a business advisor that knows the ropes. Before committing to a partner, ask them about their experience with helping owners exit businesses. Have they helped owners pass their company on to the next generation? Have they worked with a business in your industry? These questions are all relevant to gauging an advisor’s experience and expertise.

A dedicated Team. While advisors have a wealth of knowledge to share, they might not be able to answer your every question. That’s why many business advisors work with a dedicated team of lawyers, financial advisors, and other professionals on a regular basis. By offering access to experts, advisors not only provide their clients with elevated service but further establish their own credibility.

Shared Values. Trust and transparency are key attributes of a successful advisor-client relationship. To ensure they will have a fruitful partnership, both parties must confirm that their values are aligned and they have the same goals in mind.

Making the most of your exit

A study from Massachusetts Mutual Life Insurance Company revealed that 70 percent of business owners think frequently or often about their business’s value. When it comes time to sell or pass on your business, you’ll want to ensure that you know what it is—and that this valuation is as high as possible.

Many advisors use the Value Builder System, a statistically proven methodology that helps businesses increase their values, to help their clients increase the value of their businesses. The brainchild of John Warrilow, author of Built to Sell: Creating a Business That Can Thrive Without You, the VBS is an ideal tool for company owners to take advantage of when attracting buyers.

Based on their Value Builder Score, the core of the system, companies can achieve a comprehensive assessment of their business’s “sellability.” From there, their advisors can help them make the necessary changes and improvements to move forward smartly.

Exiting your business can be a confusing and even overwhelming process. To make sure the transition is as seamless and lucrative as possible, the right advisor goes a long way.

Provident CPA & Business Advisors helps successful professionals, entrepreneurs, and investors get more out of their business and work less. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning as well as our business advisory services, and discover how we help businesses exceed expectations.

When Naming a Relative as Successor, Business Comes First

Handing the reins to a family member requires in-depth planning, skill development, and a smart tax strategy

Our previous blog highlighted how almost 12 million businesses will transition ownership in the next 15 years; a process involving $10 trillion worth of assets. And family-owned businesses make up a significant portion of organizations that will be changing hands.

SCORE research on family-owned businesses shows they’re crucial to the U.S. economy. They generate 64 percent of the gross domestic product, employ 60 percent of the workforce, and are responsible for 78 percent of new jobs.

Selecting a relative to inherit the business can be a comforting choice. There’s a lot of trusts and good faith in place—but those same benefits can impede a clear focus on four core succession steps.

Have a succession plan

The most important insight in the SCORE research was this: only 30 percent of family businesses survive the transition from first to second generation ownership, and only 12 percent make it through the second to third generation change. If a business infrastructure is in place and there’s a pre-existing relationship between both parties, why does this failure rate exist? The answer is that almost half of owners don’t have a succession plan.

The Value Builder System pioneered by John Warrilow is an excellent approach to setting one up. It’s designed to make a business attractive to an outside buyer while proving it can perform smoothly during and after a transition.

The principles of the VBS apply equally well to family succession since they make owners take a hard look at every aspect of their organization, from customer relations to how much freedom a new boss can enjoy. Every change in ownership should be treated with the same meticulous attention, regardless of if the next boss is a family member or an outside entrepreneur. Planning family succession as you would impressing an outside buyer will set the business up for continued success.

Explain the plan to key parties

The definition of a key party will vary between owners, but it’s best to treat nearly every member of the staff as such. Obviously, the successor and any executives or shareholders are key. There may be a price to pay, however, for not making all employees fully aware of what transition means for them.

There’s a “right time” to inform everyone. Senior staff should know from the outset, while anyone further down the chain should be informed once all aspects of the transition are finalized. Early knowledge of a transition makes people feel vulnerable; unsure of the company’s future and the security of their jobs. And not clearly explaining the transition too late can have a similarly disruptive impact.

This uncertainty can hurt a business during a changeover through impaired performance or even losing staff. Your successor is family, but they may also have their own way of running things. Give everyone clear information on what a transition means for their individual role. This transparency will benefit the new boss since every employee will know where they stand and can act accordingly.

Develop the skills of the successor

Small increases in your successor’s current responsibilities are a good way to ease them into taking on more. Crafting a schedule of achievement dates and milestones is a proven method to gradually boost their skill set on the way to assuming full control. Don’t be afraid to constructively point out any areas where their skills could be stronger.

Let them accompany you to meetings with staff and customers to forge new bonds and participate in all aspects. The more a successor learns to see things from the point of view of fellow team members and your target market, the more prepared they will be.

Owners should not only expect but embrace the fact that their successor is an individual and not a “second self.” Improve their skills but don’t impose every aspect of how you do things; training should augment their talents, not stifle their growth.

Understand how smart tax strategy impacts family succession

Family members may choose to sell aspects of a business to each other at a lower price than to strangers. In some cases, they may gift the stake entirely. U.S. business owners can gift as much as $5.43 million in assets over a lifetime before capital gains taxes are necessary. This figure increases based on how many family members own the company; for example, a couple counts twice for a total of $10.86 million before capital gains taxes kick in.

Consider a business worth $5 million that was first purchased at $500,000. The cost base is $5million and the successor will owe tax starting at that amount if the business is sold to them. If it’s gifted, the tax would start at the original cost base of $500,000 when they choose to sell. Keep in mind: if the businesses thrives and achieves much greater worth, your child will owe quite a bit of taxes upon a sale.

For more information on operating a family business, visit For succession planning and tax advice, get in touch with us at the link below.

Provident CPA & Business Advisors helps successful professionals, entrepreneurs, and investors get more out of their business and work less. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning and discover how we help businesses exceed expectations.