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  • Writer's pictureGenoveva Meza Talbott

Mistakes to Avoid When Succession Planning for Your Business

Here are the top mistakes that people make when creating a business succession plan – and how you can avoid them.

But First, What is Succession Planning?

Thinking about estate planning, much less business succession planning is tough for everyone, even successful business owners. But, both are different and just as vital for protecting your legacy.

Estate planning is the process of preparing for the efficient and effective transfer of your assets at death. It should also include a plan for the management of your assets during a period of incapacity. Proper estate planning will ensure that your assets are managed and ultimately transferred in accordance with your wishes. Most people, whether business owners or not, create estate plans to avoid probate, thereby making the administration of their estate private, minimize related expenses, and lessen the stress and conflict that can come when someone dies without a plan.

Unlike estate planning, which focuses on the transfer of all of your assets at death, business succession planning only deals with planning for the continuity of your business. Succession planning is a strategic tool to smoothly transition operation, management, and ownership to partners, future generations, or successor owners.

So, if you don’t already have an estate plan, you absolutely must create one with an experienced estate planning lawyer. If you’re a business owner, it is vital. But, to really level up your planning as a business owner, you’ll have to also consider creating a business succession plan.

Here are the top mistakes that people make when creating a business succession plan – and how you can avoid them.

Not Adopting a Formal Strategy

Too many business owners rely on informal arrangements; they simply talk to others about vague plans once they retire. For a succession plan to be successful, a formal strategy must be put in place. Your formal strategy should align with the strategic goals of your business and include information such as:

  • The identification of the key roles within your organization.

  • Job descriptions and the skillsets necessary for these roles.

  • Objective criteria and a continuous performance management strategy to assess potential candidates.

Keeping Your Plans Secret

Keeping the details of the succession plan secret can lead to significant conflict. Estate planning disputes often arise because of failure to communicate, misunderstandings, and incorrect assumptions. The same is true for business succession planning.

Family business owners may be afraid of being honest about their succession plans because they are worried about causing family discord. They may not be prepared to talk to family members about money.

For businesses that will not be transferred within the family, conflict may still arise when employees feel that they were misled or kept in the dark. Employees who were slated to be part of the next generation of leadership may leave the company because they were never informed of the opportunity for advancement.

When business owners do not make their succession plans public, other owners or directors of the company may be under the mistaken belief that there is no plan. They may feel insecure and leave the business for other, more secure opportunities.

Transparency about your succession plans accomplishes several objectives. It instills employee trust in the company. It enables employees to know what is expected of them to advance to leadership positions. It motivates potential future leaders to achieve desired performance metrics and to commit to the business. It minimizes the risk of conflict because you can explain your plans while you are still with the business.

Making Succession a Competition

While employees should be motivated to work their way up in the company, do not make succession feel like a competition. You do not want employees to feel pressure to minimize the contributions of others within the organization. This can breed a negative business environment that is destructive and threatening to your business's future.

Not Considering Tax Consequences

If a business owner sells or transfers ownership of the business, there may be tax consequences. Your business may be worth enough to subject your estate to federal estate taxes. If the value of your estate exceeds the estate tax exemption in effect for the year of your death, estate taxes may claim a significant percentage of your taxable estate. To pay the taxes, your estate may need to liquidate business assets or your business may be burdened with significant debt to pay the taxes. Other potential taxes may include gift tax, income tax, and capital gains taxes. All of these tax consequences should be considered when determining the succession of your business. An estate planning lawyer can work with you to devise a plan that minimizes the impact of taxes on your business.

Over or Undervaluing the Business

Some business owners have an inflated sense of their business’s value. While you may feel your business is priceless, you must quantify its value as part of your succession planning. A firm understanding of the value of your business should inform your decision to sell the business, transfer it, keep a portion of it through your retirement, or make other plans for your succession.

When you establish your business, consider a methodology for valuing the business. If your business has co-owners, you can incorporate the valuation methodology into your buy-sell agreement. This will make it easier for you to value the business when the time comes because you already have a pre-approved evaluation process.

One objective way to value your business is to hire a business appraiser who can evaluate your financial documents, business goodwill, and historic data to provide an estimate of what your business is worth. This documentation will give you a clear sense of your business’s value and provide you with objective support if you decide to sell the business.

Not Facing Reality

Some business owners refuse to admit that they are mortal and business succession will happen. Your death or retirement is inevitable, so you must consider your succession when it is a far thought in the distance. It is better to be proactive about your succession instead of waiting for disaster to strike and having to react to it.

Accept that you may need help with the business succession process. Do not try to complete this process alone; the stakes are too high. A qualified business succession planning lawyer can help you identify your options, anticipate possible issues, and develop a solid plan that provides clear leadership now and in the future.

Failing to Update Your Plan Regularly

Just as with your estate plan, you should regularly review your succession plan. Consider modifying your plan if significant changes occur.

As an estate planning lawyer, I can work with you to create a comprehensive estate plan that will protect you, your loved ones, and your legacy. Once you’ve taken care of this foundational planning, we can help you develop an initial succession plan. As circumstances change, we can assist you in revising your estate and business succession plan to keep your business on the path to a successful transition.

If you need assistance creating an estate plan, give us a call. We are happy to help!

Meza Talbott Law


Claremont, California

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