The importance of succession planning has hopefully resonated by now and we all know it’s something we should be making a priority in our businesses. But with so few owners addressing succession (roughly only one-third!), it might be helpful to explore why succession planning is such a challenge – what prevents owners from doing it?
Reasons for Avoiding Succession Planning
The following are frequently offered as reasons (i.e., excuses) for delaying or avoiding the succession planning process:
- Not being sure who to call for help or how to start the process
- Worry about being “fair” to all potential successors
- Fear of possibility straining interpersonal relationships
- Concerns about how to acknowledge key personnel on the management team and valuable contributors to the business who should be retained, but are not in line for ownership
- Difficulty discussing financial matters and personal goals with others (or outsiders) because it is too private, somehow unpleasant, or considered taboo
- The owners may not wish to retire
- Struggles to disconnect from the day-to-day urgencies to focus on long-term planning
- The assertion that because successors are “not yet ready” to assume control, nothing can be done
- The entire process seems too daunting
- The perception that it is a cost to be incurred with no immediate benefit
With all these anxieties, it’s not surprising that so few businesses have an achievable succession plan in place! Most business owners do nothing or choose to focus on one element of the succession planning process and ignore other equally important issues, often leading to a poor outcome.
Consequences for Avoiding Succession Planning
Business owners who don’t plan for ownership transition are often faced with the inability to receive enough money to fund a comfortable retirement. This occurs not because owners fail to create value in their business; rather, it’s because they fail to do the planning that would have allowed them to retain that value.
All strategic exit plans should identify and address the following key areas:
- Business valuation
- Factors that drive the value of the business
- Ways to increase the business valuation
- The potential future value of the business
- Options for ownership change
- Potential tax implications of ownership change
- Tax-saving methods
Whether it’s a long-term planned event or the result of an unforeseen circumstance, the transition of your firm will be the most significant change your business will ever face.
Most people are paralyzed by the thought of their own mortality and often put off any type of planning that will lay the groundwork for a smooth transition. In a perfect world, business owners should start planning for their exit the day they open the business. But the good news is – it’s never too late to start. It’s most important to remain open-minded and flexible, be realistic, and understand where you are today in the process.