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Business Succession Planning: Avoiding the Key Mistakes

We have written previously about business succession planning (see related articles below), and a recent Wall Street Journal article reaffirms the importance of giving this topic serious attention. The WSJ article, “Preparing to Leave,” identifies some of the biggest mistakes business owners make in preparing for retirement, and it offers some useful suggestions, summarized below, for how to avoid them.

Are You Indispensible to Your Business?

If all of the power, talent and responsibility rest with you, who is going to handle those roles when you are out of the picture? If your business is too dependent on you, you are setting up your successor for failure, or you are suppressing its value to a prospective buyer.

The future success or marketability of your company depends largely on its viability in your absence. If you haven’t already done so, start assembling a capable management team to whom you can – and will – delegate the company’s day-to-day operations. Accomplishing this vital step now will promote a smoother transition to the new owner and help your company bring top dollar at sale.

Are You Planning to Minimize Your Tax Hit?

If your succession plan includes gifting a portion of your selling price, the combination of (a) owning a company that is growing in value and (b) living in times of uncertainty with respect to gift and estate taxes could result in a nightmare scenario down the road.

You can avoid such a scenario by beginning the ownership transition now, while your company is worth less than it will be in the future and while gift and estate tax rates are relatively favorable.

Do You Know What Your Business Is Really Worth?

It is not uncommon for business owners to have unrealistic expectations about the value of their company. The harsh truth is that your business’s market value has very little to do with how much money you need in retirement, and it has nearly everything to do with what it is worth to a prospective buyer (even if the buyer is one of your kids).

Effective succession planning requires that you have a reliable picture of your business’s market value. We would caution you not to rely on simple formula-based valuation methods; rather, consult with a business broker or M&A professional who can perform a market analysis, or engage a business valuation professional who knows how to apply the wide variety of valuation methods to your business, industry and situation.

Are You Willing to “Go Pro” in Selling Your Business?

Just because you knew how to build a great business does not mean that you know how to sell it. If you plan to sell to an outside buyer, taking a “for sale by owner” approach is almost certain to yield results ranging from unsatisfactory to disastrous.

The benefits of hiring an experienced, well-connected business broker or M&A advisor – in helping you prepare your company for sale, marketing your company, identifying the right buyer, evaluating offers, negotiating the best price, and holding your hand during the due-diligence process – generally far outweigh the cost of the commission they earn.

Start Now

With respect to your business ownership, start thinking now about how you want the story to end. That does not mean you have to come up with all of the answers on your own; more important, make a list of key questions, and then share them with trusted people who can advise you effectively.

Coordinating business ownership with your personal estate and tax planning is a core service of Hoopes Adams & Scharber. To start the process of transitioning your company and exploring all of the options and opportunities available to you, schedule a planning meeting with Ron Adams.


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