Succession Planning: Mistakes to Avoid

05 Feb Succession Planning: Mistakes to Avoid

More than half of small business owners in Canada have no succession plan at all – even though three-quarters of them are planning to retire in the next ten years.
A formal succession plan can be difficult and time-consuming to develop, but knowing the pitfalls can help keep things simple. While developing your succession plan, remember these mistakes:

1. Failing to make a succession plan at all. Procrastination is your worst enemy. If you wait too long, your options will be limited, and your preferred result may be impossible to achieve.
2. Thinking of succession planning as an event, not a process. A succession plan can’t be thrown together. It takes time, planning and commitment. The event is at the end of the process, when you hand over the reins to the chosen successor.
3. Failing to allow enough time to develop and implement a successful plan. The process may take several years. No two situations are the same, so it is best to think ahead.
4. Overvaluing what you want to sell. Most owner-managers think highly of their business, but a realistic assessment is invaluable when it comes to planning your next step.
5. Failing to use objective, outside advisors. Succession planning is not something you should do on your own. Working with an expert in succession planning is no different than hiring an accountant to file your taxes.
6. Failing to integrate your succession plan into your personal financial plan. It’s critical that you consider what you need to get out of the business in order to be secure in retirement. Make sure your personal investment advisor and your business advisor are part of that conversation.
7. Failing to prepare yourself for succession. Owner-managers like you strongly identify with their businesses. It may be a challenge to allow someone else to take over. Prepare yourself by loosening the strings and slowly transitioning out of the business.
8. Failing to prepare your successor. Among other things, your successor needs the respect and support of all stakeholders, including investors, lenders, suppliers, customers, employees and others. It’s critical that you do your part to encourage that.
9. Failing to prepare your business. The business must be able to prosper without you, and your successor needs to understand the business model and any associated plans.
10. Failing to give up control. Many owner-managers never really give up control. Unfortunately, this leaves your successor unable to be a strong leader who is able to take steps to grow the business in appropriate ways. It also leaves the business at risk.
11. Hanging on too long. A succession plan should ideally last six months to two years. Anything more than five years does not even qualify as a succession plan. Make sure you’re ready and then make it happen.\
12. Failing to secure what you need financially for the next stage in your life. If you are no longer in control, you should not be dependent on the business. This means your retirement funds must be secure before you transfer authority to the successor.
13. Selling for more than fair value to children or management. Your children or your management team may have reasons for paying more for the business than a third party – but the business itself may stumble under that burden. Make sure you sell for the right amount.
14. Providing too much financing to your successors. Similarly, providing overly-favourable financing puts your purchase price – and your retirement money – on the line.
15. Failing to do what is in the best interests of the business. Remember, your business is separate from you. Many people depend on it. Do not put your personal agenda over the best interests of the business—you will risk everything that you built.
16. Failing to build a vision of the future of the business into the plan. The business will enter a new stage when you leave, and it will need a new vision. The succession plan should be an integral part of that vision and an important first step in making the vision happen.
17. Failing to involve your successors in developing the plan. If your successors are involved in the process, they will be better able to move the business in that new direction when the time comes.
18. Failing to share the plan with others. If you don’t tell your chosen successor that they are the next in line, they won’t be able to step in. Sharing the plan with the right people significantly increases your chance of success.
19. Failing to put the plan into writing. If you have a plan but it’s all in your head, it won’t be possible for your successors to implement it when you fall ill or die. A plan is only helpful if it is written down.
20. Failing to integrate the plan into your legal documents. Once your succession plan is formalized, your will, powers of attorney, family trusts, shareholder agreements and similar documents will need to be reviewed and amended. Making all the documentation work together is an important part of ensuring that the plan is effective and successful.
21. Failing to integrate insurance into the plan. There is a role for insurance in many succession plans, including both life and critical illness insurance. Don’t overlook how useful insurance can be for risk management, funding and tax planning.
22. Failing to build in flexibility for unforeseen events. Try to anticipate unforeseen or unplanned events such as death, critical illness or a downturn in business fortunes. Any of these events could happen to you or to your chosen successor.

To learn more about transitioning your business, contact us.

Joel Rose

With over 35 years of experience, Joel Rose helps families – and their businesses – to prepare for the future. He offers guidance and support to help his clients create estate plans and succession plans that meet the needs of the whole family. Through his extensive professional and personal experience, Joel is known for his compassion and his ability to find a creative solution to meet each family’s needs.