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Succession Planning Nightmares and How to Avoid Them

Terry Mullen
Jan 5, 2017

Succession planning is one of the most critical parts of running a business, but it is also one of the most frequently ignored. Even the most conscientious business owners often put off succession planning. They wait until they are ready to retire to think about who will take over the practice, how it will be run and how to transition existing clients to the new leadership team. That procrastination creates real problems with the succession, sowing confusion and ultimately making the transition less likely to succeed.

Whether you are in the prime of your working years or already looking forward to a well-earned retirement, it is important to review your succession planning options and work toward a better future for yourself and your clients.

One reason so many business owners put off succession planning is that there are so many horror stories surrounding the subject. It does not take long to find succession planning horror stories, from family members who no longer speak to one another to the trusted succession candidate who used their inside knowledge to start a competing firm. If you want to avoid the same fate, you can start by reviewing these cautionary tales and learning from the stories of those who have gone before. 

If you doubt the importance of sound succession planning, just consider this startling statistic - more than 70 percent of family-owned businesses fail to survive the move from the founder of the firm to the next generation. If you want your business to be an exception, you need to put a solid succession plan in place.

There are countless cautionary tales and succession planning horror stories out there, but the case of a Boston-area restaurant empire is particularly illuminating. This firm was a true family business, with all three children chipping in and learning the ropes from the ground up. But when it came time to turn over the reins, the founder of the company was reluctant.

The founder claimed that his grown children were simply not serious enough to take over the business.  Throughout the years, the man who built a formidable restaurant empire from the ground up turned down one buyout offer after another, rebuffing his grown children when they offered to buy the business.

The results of those succession planning missteps were dire, and now the firm finds itself deeply in debt and in need of a private equity bailout. It all could have avoided with better communication and a well thought out succession plan from the beginning.

Make Succession Planning a Priority

One of the best ways to avoid your own succession planning horror story is to make succession planning a priority instead of a mere afterthought. Running a family business is hard, and it can be difficult to look beyond the day to day operations and plan for the future. But no matter how hard it may be, developing a comprehensive succession plan should be one of your most important goals. No matter how much you love your work, you will want to retire someday, and having a succession plan in place will allow you to relax and enjoy your time off.

Succession planning is always a difficult process, but it can be particularly fraught when the business owner and management team are also family members. Running a family business is hard, but developing a succession plan for a family enterprise can be even harder.

Another reason so many family businesses end up as succession planning nightmares is a natural reluctance to discuss financial issues. Many business owners, even highly successful ones, are reluctant to discuss financial issues with their grown children, and they put off succession planning as a result.

 Without a basic understanding of the business and what it is worth, those adult children will be at a loss when making their own succession plans. Having an open and honest discussion that encompasses everything from valuation and tax implications to management transition and ongoing support, is the best way to avoid a succession planning nightmare of your own.

You can prepare for the discussion by taking an honest look at the family business and what each member of the family brings to the table. It can be extremely difficult to separate business from family, but doing so is an essential part of planning an effective generational transition.

There are a number of factors to consider, from how involved each family member has been in the business to the education and training they have achieved thus far. Sometimes the chosen successor is competent and hard working, but still requires some polishing before taking over the practice. You can build those requirements into the succession plan - and provide ongoing support to ensure a smooth transition.

Avoiding Family Discord

There are two major factors at play in the 70 percent of failed generational transitions - family discord and taxes. You may not have the ability to change tax policy, but there are things you can do to minimize family discord as the succession plan takes shape.

Keeping the lines of communication open and being honest about the decisions you are making and why is an essential first step. If the family members do not understand the reasons behind the succession plan, they may become resentful once the new leadership team is in place. They may even try to undermine the relatives who took over the business, making a successful transition even more unlikely.

Management and Ownership

It is important to separate management and ownership when working on the transition and developing a sound succession plan. Management and ownership are often confused, but they are not one and the same. You may feel, for instance, that one of your adult children is a born manager but not a responsible business owner.

In that case, your succession plan could stipulate that individual take over essential management duties and work with you to ensure a successful transition. At the same time, you can give equal ownership shares to each of your adult children, regardless of how involved they are in the day to day running of the business.

There are plenty of succession planning horror stories out there, and statistics show that more transition plans fail than succeed. That does not mean, however, that your own business succession is doomed to failure. With the right planning and preparation, you can pass your business on to your heirs and build a legacy you, and they, will be proud of.

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