Business owners tend to put off succession planning if they don’t intend to exit in the near future. But circumstances can change quickly, and not having a plan in place could be a costly mistake.
“Every business, large or small, will reach a point where a decision needs to be made as to the next step regarding ownership,” says Corinne Baughman, a partner at Moss Adams LLP. “Whether the transition is one year or 10 years away, it needs to be part of the overall plan for any company.”
Smart Business spoke to Baughman about the process of succession planning and how it provides benefits before a transition occurs.
Do most businesses have succession plans?
The main problem with companies’ succession plans is that they don’t exist. Owners have plans to increase sales or add personnel, but they don’t have a strategic plan as it relates to a successor because it’s something they can kick down the road. It takes most companies years to implement a succession plan, and delaying limits options.
Every business should have a succession plan. You might think you’re going to pass the business on to management, sell to a strategic buyer or gift it to your children. That can change, but you need a plan in place to start addressing the issues that arise no matter which way you’re going to exit the business.
What is involved in succession planning?
The first step is to consider your long-term goals. Is it to grow larger, or expand the product or client base? Whether it’s a single owner or a private equity group, what are their business goals? Do they want to retain a certain amount of ownership, pass it on to family members or step away completely?
Once you’ve answered those questions and determined what everyone wants, it’s time to get into specifics and identify your way of getting to liquidity, whether it’s a sale, private equity backing, going public or whatever.
Then you need the right people in place to move the plan in that direction. That’s where many companies fail; one person calls the shots and succession drops to the bottom of his or her priority list. It’s important to spread the wealth of responsibility internally and develop the right support group of attorneys and CPAs. Everyone on the team needs to understand how to grow the value of the company — until you have good strategic financial and business plans, you’re not going to be ready for succession. You’re looking to get the most value out of a transition, but you should be doing that on a daily basis anyway and working on ways to increase the value of the business.
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What are the most common mistakes companies make?
The biggest one is timing — the tendency is to put off succession, but fewer opportunities are available the closer you get to a transaction. You might be in the wrong legal structure or find out you should have had additional training for management personnel.
This becomes crucial when something unexpected occurs, such as a death or someone leaving the company. A key component of the succession plan may be gone, and without a strong team you may not have a backup plan.
Another mistake is that owners think a certain dollar amount is a home run that will set them up for life, and don’t plan for the net impact. It can be eye opening to owners when they realize what they end up with after taxes isn’t what they were expecting. You need to forecast future needs and assume whatever cash you receive on the day papers are signed will be the only cash you’ll receive. Many clients had deals with earn-out provisions and didn’t get another penny. Just as you do for your business, you need to create a financial model and budget for your personal needs.
Some people don’t like to think about succession and hang on too long, especially when they built the business themselves. But at some point you’re going to have to step down, and you should have a plan with goals and a time frame for that transition. ●
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