Business Succession Planning

Next week Tuesday I will be presenting at a Fennimore Chamber of Commerce “Lunch and Learn.” The topic I was asked to cover is business succession.  I have helped many businesses succeed without delving into the significance. What I mean is, to create a successful business succession plan the attorney must consider all the legal ramifications; and believe me there are many. Estate planning, tax planning, etc. What I didn’t realize until I prepared my outline for the presentation is all of the “other planning issues” faced by the business owner at the time of succession. Family issues, fairness, pride, nerves, etc. With that as a backdrop, I researched to find and develop a list of common mistakes made by business owners at the time of succession. The following is a list of a few common problems I have found and believe me there are others to consider.

1. Common Problems that Prevent a Successful Business Succession Plan – What NOT to Do:
   1. Oftentimes business owners do not think about the welfare of their business whenever they pass the torch to a business successor
      1. Sometimes, business owners will ask for an unreasonable purchase price when selling their business to a family member or third party.
      2. If a deal is completed with an excessive price, there could be hazardous results since it will substantially change the business’s economic equilibrium and increase the costs of operating the business.

• Over time, the business’s expenses could not be used to support the business, going instead to the debt used to cover the business successor’s acquisition costs.

1. Sometimes, a small business is its own worst enemy. Some circumstances that cause a business to fail from the inside out.
   1. The business successor not having enough leadership ability or experience to properly take over the business,
   2. The business successor not having enough education or skill to manage the business or to supervise over the business’s work product,

• The business owner and workforce’s self-satisfaction that the business can be transitioned without adequate planning

1. Many clients, out of a sense of fairness, will try to divide their business interests equally among all of their children. (Estate Planning implications and Life Insurance and other tools – there is such a things as too fair)
   1. In many instances, this can lead to bad results—
      1. The business’s division can water down the business’s profitability, giving the children no incentive to continue the business.
      2. Worse, it might cause management problems where a share of the business goes to a child that is a ne’er-do-well and another goes to a golden child.
         1. For example, without the right business structure, the ne’er-do-well could easily make business deals that could destroy the business.
      3. Additionally, differences between the children’s personalities might cause the business to dissolve over a lack of compatibility
   2. Outside market forces – things outside of the businesses control
2. Why is it so important to have a plan?
   1. Oftentimes a successor is chosen at the last moment due to a lack of planning and subsequent sense of urgency.
   2. After a business owner dies, becomes severely disabled, or retires, interested parties may scramble trying to find someone that they believe, rightly or wrongly, can manage the business. May have ethical considerations – like lawyers – duty to clients.