Mistakes when developing a Business Succession Plan

Neufeld Legal PC: Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

To develop a successful business succession plan, it is important to avoid common mistakes that have been previously made by other business owners with respect to their own failures in business succession planning. As such, it is worthwhile to review and understand those common mistakes when developing a business succession plan, such that your business succession plan avoids and/or mitigates against those prospective mistakes and their adverse impact on the commercial enterprise and its stakeholders.

A. Delaying the Process. An all too common succession planning mistakes is either believing there's plenty of time or that succession planning is only for large corporations. Many owners focus solely on day-to-day operations and put off this crucial long-term planning. In turn, a forced or unplanned exit due to illness, disability, death, or an unexpected offer can leave the business in chaos, severely reduce its value, lead to family disputes, and result in significant, avoidable tax liabilities.

B. Lack of a Formal, Written Plan. It is a mistake to rely merely on informal conversations, verbal agreements, or "handshake deals" about who will take over. The result is misunderstandings, conflicting expectations, and a lack of clarity can lead to severe disputes among family members, partners, or employees; and without a written plan, there's no legally binding roadmap for the transition.

C. Failing to Involve Key Stakeholders. It is never advisable to develop a business succesion the plan in isolation (e.g., the owner and their lawyer only) without consulting family members, key employees, business partners, or even external advisors (accountant, financial planner, valuator). The negative implications are virtually endless, from resentment, lack of buy-in from the successor, missed opportunities for valuable input, and a plan that doesn't align with the aspirations or capabilities of those involved. High-potential employees might leave if they don't see a clear path forward.

D. Not Identifying and Developing the Right Successor(s). Don't automatically assuming a family member is the right choice for business succession. Assuming children or relatives are interested or capable, or forcing the business on them without assessing their skills, passion, or desire. Also, be very careful about focusing solely on one potential successor, alienating other talented employees who might then leave. You also want to assess both internal and external talent, as opposed to automatically looking externally when capable leaders might exist within the organization, or vice versa. Furthermore, you don't necessarily want to find a "carbon copy" of the current owner, instead you should be striving to identify and locate the skills and competencies truly needed for the future of the role. The fact remains that a successor who is ill-equipped, unmotivated, or a poor cultural fit can cripple the business, leading to decreased value, employee turnover, and operational issues.

E. Neglecting Financial and Tax Planning. Focusing solely on who will take over, without considering the financial implications for the exiting owner or the successor, and failing to optimize for tax efficiency, can have unexpected and significant tax liabilities (e.g., capital gains tax on the sale of shares), insufficient retirement funds for the exiting owner, or the successor lacking the means to purchase the business. Poor planning can also lead to disputes over business valuation.

F. Ignoring Business Valuation. Business owners should not assuming the business is worth a certain amount or use an informal method to determine value, given the significance of an accurate valuation, which can be factually substantiated. Not only can this resolve disputes between buyers and sellers, an unfair price (either too high for the successor or too low for the seller), and better facilitate the securing of financing, it can be of particular importance with tax authorities.

G. Lack of a Contingency Plan (What if the Plan Fails?). Developing a succession plan but not having a "Plan B" if the chosen successor changes their mind, becomes ill, or if market conditions shift dramatically. Without contingency arrangements, arising from critical thinking and identifying considerations arising therefrom, otherwise the business may well be left vulnerable and back to square one if the primary succession path becomes unviable.

H. Failing to Address Ownership's Reluctance to Relinquish Control. The owner, particularly a founder, finds it difficult to truly relinquish control and step back, even after the formal transition. They may continue to interfere or micromanage. The persistence of the former ownership can seriously undermine the successor's authority, causing confusion among employees, and potentially leading to the successor's frustration and eventual departure.

I. Inadequate Documentation and Training. A business succession plan that fails to formalize standard operating procedures, client lists, key relationships, and vital information can be extremely detrimental to the successor, especially where there is that much more that the successor will have to taken on when assuming control. The loss of institutional knowledge, disruption of day-to-day operations, and a steep learning curve for the successor cannot be made more difficult and time-consuming where there has been an inadequacy in documentation and training.

J. Not Regularly Reviewing and Updating the Business Succession Plan. Treating the business succession plan as a one-time event rather than an ongoing process can prove particularity destructive. When a business succession plan becomes outdated due to changes in market conditions, tax laws, business strategy, personal circumstances, or family dynamics, it can all too easily be rendered ineffective when it is most needed.

Significance of Professional Advice: As with most corporate and tax planning strategies, a business succession plan can be complex legal undertaking that must postulate and consider multiple variables and scenarios, which oftentimes detailed legal drafting to account for the particular facts and circumstances. It is highly recommended to seek advice from a knowledgeable lawyer to ensure legal compliance and to properly structure the succession plan to meet the specifics of the business and the objective outcomes.

For knowledgeable and experienced legal representation for business succession planning, contact lawyer Christopher R. Neufeld at Chris@NeufeldLegal.com or call 403-400-4092 (Calgary, Alberta) / 905-616-8864 (Toronto, Ontario).

Business Succession Planning - Contingency Arrangements Business succession planning isn't just about planning for the optimal outcome, it is also about establishing contingency arrangements in the event the original plan cannot be implemented as originally intended or its actual implementation (as impacted by how the business situation has changed over time) would run counter to the planner's overarching objectives. Read more.

 

Mistakes when developing a Business Succession Plan To develop a successful business succession plan, it is important to avoid common mistakes that have been previously made by other business owners with respect to their own failures in business succession planning. As such, it is worthwhile to review and understand those common mistakes when developing a business succession plan, . .  . Read more.

 

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