Every Business Needs a Succession Plan: How to Prepare a Successor and Avoid Common Mistakes

By Richard Eisenberg

Succession planning is all about creating a legacy so that your business will continue to exist even if you sell it.

This article is reprinted with permission from NextAvenue.org.

Succession planning for business owners isn’t just for the ultra-rich and powerful like the Roy family, who grapple with it on HBO’s “Succession.” Having a plan for who will take over when the founder leaves is essential for all entrepreneurs.

Yet 30 percent of business owners don’t have a formal business succession plan, according to the Northern Trust Institute’s Business Owner Benchmarking Survey. Worse, of those owners who have succession plans in place, 50% have major concerns about their successor’s ability to sustain the success of the business.

Ask an expert

With that in mind, Next Avenue spoke with Eric Becker, 60, co-founder and co-chairman (with Avie Stein) of Cresset Capital Management, a Chicago-based firm that specializes in advising entrepreneurs, CEO founders and their families.

The following are highlights from the conversation with Becker’s advice on how and why you should create a succession plan for your business:

Next Avenue: Why do so many business owners have no succession plans? And why do those who do worry about them?

Eric Becker: There are many reasons, and I would say, in my experience, that the 30% number may even be an underestimate. In some ways, this is a little like other areas of life that require planning. People don’t always want to go there.

For example, having a will and doing personal estate planning — a lot of times people throw that down the road. This is because we do not want to face these realities.

Another reason: small businesses often have limited resources. But there are resources available to help people do this kind of work. And it’s very, very important.

I wonder if some of it has to do with ego as well – that a business owner might say, “Nobody can run this business the way I do, so what’s the point of trying to have a succession plan ? They will just screw it up.

It’s true. I have a friend who calls this “Magic Man Syndrome” which means “I’m the Magic Man or the Magic Woman and this business wouldn’t exist without me.”

This is a mistake.

When you build a business, build a business worth buying. Think about it through the eyes of the buyer and see what they see. How would a buyer view your business? If you think of yourself as that magical person, the buyer will say, “What if something happens to Joe or Jill? What will I do?’

When you look at your business through the eyes of a buyer, you can figure out the right things to do, identify vulnerabilities or gaps, and then fill them so that you end up with a business worth buying. And it is the most powerful succession plan of all.

What are the main benefits of succession planning?

The first is peace of mind.

The second is the financial benefits. By doing the right succession planning, I believe you will build a more resilient, flexible and valuable business.

Third would be the financial benefits around the tax savings, which can be very significant.

The last thing I would say: Like many things in the world and in our lives, this is simply the right thing to do.

Why should your employees be in a less stable business because you didn’t do the proper planning? Why should your family have the terrible anxiety if, God forbid, something happens?

When should an entrepreneur start thinking about succession planning and why?

As soon as possible. You almost can’t start too early. You want to start this planning early to help you build a better business and sleep better at night.

Doing this planning can help a business survive the founder’s illness or accident or a change in interests. If one day you wake up and you don’t love the business the way you used to love it, why should the customers or the employees or the community suffer because you didn’t do the right planning?

Part of succession planning seems to be about creating a legacy so that your business lives on when you’re not running it, perhaps even when you’re no longer there. right

Absolutely. I think having a legacy is a beautiful thing.

See: Many small business owners remain resilient and optimistic: Here’s what 2023 could hold for entrepreneurs

Planned vs. unplanned inheritance

You say succession planning is also about estate and tax planning. Can you connect the dots?

Sure. So there is planned succession and unplanned succession.

An unplanned sequence would be if you wake up one day and want to do something completely different, or you have an accident, or something happens and you’re out for an extended period of time or permanently.

And then you have an estate plan that says: By that date, I intend to sell this business or retire or sell it to the employees or whatever.

When you exit the business, if you’ve done the right succession planning, not only can you reduce the tax burden on the sale itself, but for a family business, you can make a significant difference in the cost of passing those interests on to the next generation.

So it’s about planning where your wealth will go and the philanthropic goals you might want to achieve.

Who should plan

When you talk about estate planning and tax planning, are you just talking about family businesses, passed down to a child, or all businesses?

All businesses that involve a sale with shareholders because these are issues that come up again and again and again, whether you’re the CEO of a big company and you have stock options and you’ve built up ownership over time or you’ve built a small private business.

You believe that owners should also think about identifying with their business. What do you mean?

How the sale will affect who you are. Because many people identify with business. “I am the business.”

Also, I know people who have sold their businesses and then had their children come to them later upset and say, “Why didn’t you ever discuss this with me? I was interested in this business; I would love to join you. And they didn’t even think to ask.

For an owner who hasn’t done any succession planning, what’s the first thing they should do?

The first thing you need to do is this emotional and personal planning. Think about what your personal goals are with this business, how does it relate to any family considerations, and how does it relate to yourself in terms of what you want to do with your life?

Then, after you’ve talked to yourself, the next step is to start looking for who can help you with this planning process. A financial planner would be a great person to talk to. A property tax attorney would be an excellent person to speak with. And then, potentially a business consultant who can help you identify gaps or vulnerabilities on the way to building a business worth buying.

Mistakes to avoid

What are some of the succession planning mistakes you’ve seen?

Mistakes can go all the way back to the formation of the business itself. Not working with professionals to set up ownership structures in the most ideal way, from an asset protection and estate tax efficiency standpoint, right from the start. Without seeking advice from a tax accountant on the small business tax incentives you may qualify for when your business is small and early.

The second mistake is not building a team of people where the management of the business is covered in case something happens to the founder.

I can give you an example of a non-profit business whose owner got sick and hadn’t assembled the right team beforehand. Business became unstable during his illness. His friends who were part of this organization took over his business for a few months and kind of held it together until he could get back on his feet.

It’s a terrible feeling to be in the hospital and think that the business may collapse without you.

When you get later in the evolution of the business, the succession mistake is that someone comes along and wants to buy your business and makes an offer, and you don’t have the right experience and advice on how to handle it.

We’ve seen people unfortunately sometimes sell their businesses for less than their full value because they didn’t have the right expert help and management [succession] process. This is a mistake that in some cases can cost people literally millions of dollars.

Related: 6 Essential Estate Planning Documents Every Senior Needs

Handing over the family business

Can you talk a little bit about succession planning and the family business? What should owners think about transferring their business to their children?

You should understand your children if you are thinking about it. Being the child of a successful entrepreneur parent myself, I can tell you that many times these are big shoes to fill. You may not even understand the pressures the next generation may experience.

So I think it’s very important to talk to your kids about it and understand their interests and be open. What you may end up finding is that you have kids who aren’t interested [in running the business]. Then you have kids who are interested but not capable. Then you have kids who are interested and capable.

I think probably the biggest challenge would be a child who has no interest in the business, especially if the parent thought that was their successor.

Of course, you don’t want to pressure the next generation into something they don’t want to do; it is to put a heavy weight on someone’s shoulders. This is a big mistake.

The other big mistake is taking a kid who doesn’t have the training, experience, or ability to do this. Putting them in such a position is also very stressful.

How to prepare a successor

For the child who is interested and has the ability, it’s about cultivating that with mentorship, education and training.

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01-31-23 0501ET

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